competition policy and industrial development - mario possas & heloísa borges (v4)

7/27/2019 Competition Policy and Industrial Development - Mario Possas & Helosa Borges (v4)

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IPD Industrial Policy Task Force

Competition Policy and Industrial Development

Mario L. Possas

Heloisa L. Borges**

(Fourth draft)

Introduction

This study as a whole is about industrial policy, and competition policy especiallyantitrust is not usually seen as part of an industrial policy framework. On the contrary, they areusually seen as conflicting with each other.

Some effort should thus be spent to define what role should be ascribed, under a non-liberal and unorthodox framework, to competition policy within, or at least related to, industrialpolicy. This will be done in the first section, where the main objectives and scope of competition

policy in such a framework will be briefly discussed. Basic theoretical issues will be addressed,which we hope may shed some new light on what is usually seen as conflicts between thesepolicies.

In the second section, the experience of selected developed economies, as well as newlyindustrialized ones, with both competition and industrial policies along their process of industrialdevelopment, will be examined. It will focus on the unequal emphasis given to one or the otherpolicy through time by different countries and their specific institutional means of enforcing eachone and of linking them. It should be noted that, when addressing developing economies, specialconcern will be given to newly industrialized ones; economies still in early stages of industrialdevelopment will not be discussed.

The third section will deal with the implications of the general framework introduced

before, as well as of from industrialization experiences, for the design of competition policy inrelatively advanced developing economies. An issue to be raised is the changing role of bothindustrial and competition policy along the process of industrial development. A brief conclusionwill follow.

It should be underlined, though, that this is a qualitative study that is, limited toidentifying and describing patterns of interaction between competition and industrial policies inselected countries. No attempt is made to measure these policies impact quantitatively.

1. Objectives and scope of competition policy as related to industrial policy

Although other objectives can be argued, the main goal of competition policy is to sustain

or increase competition within a market environment with a view to preserve or enhanceeconomic efficiency and social welfare. Both productive and allocative efficiency are expected toincrease with the degree of competitiveness of markets, with the usual exception of naturalmonopolies or activities considered to need regulation for some reason.

It should be kept in mind that competition policy has a much broader scope than antitrustpolicy, important as the latter may be (and usually is). While antitrust is mainly defensive, being

Institute of Economics (IE), Federal University of Rio de Janeiro (UFRJ)** Graduate student and researcher, IE/UFRJ.

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able to preserve to some extent competitive market structures and conducts, both throughprevention and punishment of abuses of market power, competition can be stimulated by manyother means, ranging from trade policy (v.g. reducing tariff and non-tariff protection) andindustrial policies to specific technology policies (v.g. R&D and innovation incentives).

1.1. Theory and normative issues

Competition policy, in general, and antitrust, in particular, may be viewed as part of aregulatory framework, since they involve some kind of systematic market intervention. On theone hand, what is usually called regulation as such could be seen more precisely as a kind ofregulatory policy where intervention measures are continuously active let us call it activeregulation -, while antitrust may be seen as another kind of regulatory policy where interventionis not permanent, but only triggered by some specific cause, whether structural or behavioral, andwhose means are less pro-active let us call it reactive regulation.

For mainstream economists i.e. almost all - the rationale for both kinds of interventionis market failure. From our unorthodox standpoint this is thought to be essentially misleading1.Markets do not fail because they stand far from the ideal of perfect competition, not the least

because the static model of perfect competition is in no way a theoretical or normative ideal, asSchumpeter has shown long ago. The basic reason to support market intervention through activeand reactive regulation is to promote competition on normative grounds, i.e., not becausecompetition does not work, but because it could and should, from a public policy standpoint work under greater pressure and with better results in terms of costs, prices and innovative drive.Instead of replacing markets with direct state intervention, which does not work in mostinstances, a better policy toward markets would be to drive them through appropriate incentivestructures, by means of regulation and other competition policy instruments, so as to extract fromregular market working, when possible, more than their profit seeking drive would deliver byitself. In other words, to align private incentives with public interest, acknowledging that this isby no means guaranteed in capitalism, as assumed since Adam Smith by liberal economists.

In order to reach this target, to search simply for more competition usually will not do,since in many cases this is hard to define, apart from the conventional structural assumptions of alarge number of competitors, absence of information asymmetries, etc. A better theoreticalapproach seems to be to associate the degree of competition of a particular market with betterefficiency (including innovative) results from existing competitive structures, regardless of itsstatic morphology. Following Schumpeter, this can be accomplished even in oligopolies if notmostly in oligopolies; and this can only be assessed as well as promoted dynamically, boththrough time and with dynamic analytical tools.

From this standpoint, one can say that liberal economists support free markets for thewrong reasons. They idealize perfect competition for its supposed spontaneous ability tomaximize static allocative efficiency, while markets should be seen, since Schumpeter, as

powerful mechanisms under appropriate incentives and regulation - to foster economic progressthrough innovation, which could be understood, from an evolutionary perspective, as a kind ofdynamic efficiency that could be called selective efficiency.2 Briefly, it could be defined as anassessment of the extent to which a market, as a selective environment, induces the evolutionalong any innovative trajectory to be as close as possible to an objectively defined progress alongsuch trajectory. Although there is no room here to go further - and this concept perhaps could

1 See the leading paper on this volume, by Cimoli, Dosi, Nelson and Stiglitz, section 1.2 This could be seen as a suggested normative counterpart of NELSON & WINTER (1982) classical evolutionary

perspective.

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merit a deeper consideration -, at least the basic idea should be kept in mind: selection is inprinciple what markets can do best, provided some competition policy is not absent. Normativetheory is always at need when dealing with economic policy. And an evolutionary/neo-Schumpeterian normative theory needless to say, directed towards dynamic and selectiveissues, instead of static Pareto-like allocative theorems - has never been carefully addressed, letalone developed. Maybe it is time to put it seriously in the unorthodox agenda.

1.2. Competition policy as industrial policy

Competition policy may conflict and often does mainly with two other ones: tradepolicy and industrial policy. Given that trade policy is designed to protect local industries againstforeign competition, not to protect local competition or consumers, some degree of conflict isinevitable and the problem is simply how to manage it when it happens, as long as trade policy isa permanent national policy everywhere. As to industrial policy, it seems that such conflicts areto some degree overestimated, as discussed below. In any case, some of the most conspicuoussources of conflict are already being given much attention and acceptance by antitrust policies,such as interfirm agreements towards knowledge transfer and R&D sharing, provided they are

expected to generate substantial efficiency gains and few competition losses for the marketsinvolved.

To put it more generally, to the extent that competition is desirable, and to enhancecompetition in the market environment as well as to increase competitiveness of firms arelegitimate goals of any contemporary industrial policy - especially for countries that are alreadyindustrialized -, any possible conflicts should be dealt with carefully, trying to take competitivematters into serious account, and not to dismiss them as less relevant. Otherwise, as will be moreextensively argued in the last section, serious policy mistakes and even failures may not beprevented. In short, competition policy should be seen as part of, instead of as opposed to,industrial policy, at least in the case of industrialized economies including newly industrializedones (NICs), but excluding those still in early stages of industrial development, in need of some

kind of significant infant industry protection. It should be kept in mind that the latter cases will beleft outside the scope of this chapter.T. Jorde and D. Teece (1997:12) give a good general definition of industrial policy, wide

enough to encompass competition policy, as suggested above: (...) the aggregate of policies thatdirectly and indirectly affect industrial performance through its impact on microeconomicvariables. It seems to be high time to abandon the traditional identification of industrial policywith sectoral policy and/or with protectionism.

First of all, a much wider concept is required if one intends to bring into the frame ofindustrial policy strategic policy attempts to influence the transformation of an existing industrialstructure into a more dynamic and innovative one through learning and capability accumulation,as recorded in several cases of successful industrial and technological catch up, e.g. the case of

Japan.3

Second, the traditional scope is also too narrow for present concerns with competitivenessin a global context, and at the same time the so-called horizontal policies are in some cases tooimportant for good or for evil - to be left exclusively to liberal economists. The problem withconventional sectoral policies is not that they are wrong or useless, but, first, that they are surelynot enough, and, besides, that sometimes they may be very expensive and inefficient as compared

3 See, for example, JACQUEMIN (1987), ch. 6, for illustrations and some analytical discussion.

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to horizontal ones (when the comparison is feasible), and more specifically, to competitionpolicy.

Competition policy should be seen, at the very least, as a necessary complement tosectoral industrial policies. But it is arguably more than that - an integral partof it. To improvefirms capabilities - v.g. through industrial and technology policies - so that they may succeed inbeing more competitive in some market environment cannot work by itself, so to say from the

supply side, unless the corresponding demand side involves a competitive marketenvironment be it international or even domestic or regional. In short, competitive pressures onindividual firms must be hard enough not only to dissipate monopolistic rents, as in thetraditional allocative approach, but, more importantly, to induce them to adopt active competitivestrategies in order to succeed, instead of just profiting from the incentives provided by industrialand technology policies, with no significant social welfare counterpart.

Conflicting issues between competition and industrial policies can also be viewed underthe light of the Schumpeterian tradeoff referred to by Nelson and Winter (1982, chap. 14), i.e.,the widely accepted fact that aspects of the structure that are conducive to innovation may bedetrimental to the achievement of Pareto optimality in the short run (p. 329). This may beparticularly relevant for industrial development - our main concern here -, for at least two

reasons. For one, since firms in industrializing economies usually face higher risks, from severalsources, that may hinder efforts to innovate, to learn or to keep pace with technical progress, andtherefore seem to be more sensitive to incentives and resistant to profit margin constraints due tomore competition or less protection. A second, and most important, reason is that to increaseinnovative capabilities of local industries in developing economies usually requires someintensive learning by firms, and this may involve some degree of protection against freecompetition, especially from potential (local or foreign) entrants, and therefore some degree ofconflict with competition policies, at least in the short run.

But market structures and innovation are related in many complex ways, and thereprobably is no straightforward solution to this tradeoff for industrial and competition policymaking. Not only is it theoretically doubtful whether an optimal tradeoff level could ever be

devised, but any policy designed to substantially change a given industry structure in apredetermined way could be expected to fail, since structure is essentially endogenous to aregime of Schumpeterian competition (loc. cit., p. 333).

In this way, antitrust policy as practiced today and as further discussed ahead -, whileclearly not sufficient in itself to promote competition, steps on a relatively safe ground when itlimits itself to structural intervention to prevent mergers and acquisitions so to say, artificialforms of concentration - from gathering market power and monopoly rents with few or noefficiency gains, as well as to prohibiting anticompetitive behaviors. In any case, market powerand monopoly rents as such are accepted and usually not considered illegal when resulting fromnormal competition, but only when based upon or propitious to abuse of market power ordominant position. Curiously, since the old rigid structuralist approach ceased to rule in antitrust

(by the late 1980s), not only neoclassical micro theory, but even the Schumpeterian tradeoffhave been to some extent embodied in antitrust law and practice, although the latter, of course,only implicitly. In other words, in the last two decades or so, industry concentration and marketpower as such have been losing their former prominent place in antitrust policies in favor of amore flexible, analytically oriented, view toward efficiency-enhancing mergers and acquisitions,as well as a greater concern with anticompetitive behavior.

It should be noted, however, that this change did not go far enough to encompass typicalindustrial policy (or trade policy) targets or instruments within antitrust policy. In particular,either protectionist barriers or learning incentives, arguably functional for industrialization, in the

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former case, or for catching up tecnological frontiers, in the latter, remain outside the scope andobjectives of antitrust, although not necessarily (or not always) incompatible with them. After all,this is what one could expect from a complementarity of these policies. Such limits to antitrustpolicy and instruments may also imply that it may be more difficult to implement or fully enforcethem in a context of industrialization or, to a lesser extent, of technological catching up. This kindof timing tradeoff is part of the story told by the experience of many countries in implementing

antitrust policy and its relation to existing industrial policies, as described in next section.Anyway, there seems to be no simple answer to such a tradeoff, either.

2. Industrial policy and competition policy: some lessons from international experience

Prior to discussing the relationship between competition policy and industrial policy indifferent countries, a distinction should be made between al least two different scopes underwhich the label industrial policy has been applied.

In a narrower sense, industrial policy refers to a subset of economic policies that seek toprovide special advantages or assistance to particular industries or firms. These may includedirect or indirect subsidies as well as preferential government procurement and tariffs or other

forms of trade protection4. This is the first definition that comes to mind when one refers toindustrial policy measures, but it is too narrow to comprehend the present range of policymeasures that a government may adopt regarding its national industry.

In a broader sense industrial policy involves the formulation of goals for specific sectorsor industries as well as a set of coordinated efforts to achieve them. In this sense, the term shouldbe viewed as encompassing the full range of measures that governments employ to promote anefficient industrial structure. These may include the provision of direct support for R&D, trainingprograms, tax policies or other measures directed to facilitate some desired structural adjustment.

What is, then, the role of competition policy in the broader approach for industrial policy?Focusing on the economy-wide concept, competition law and policy can themselves be viewed asa key element of an effective industrial policy, as they strengthen incentives for continual

innovation and the systematic upgrading of products and production processes that may enhanceeconomic efficiency.Moreover, even under the narrower concept countries usually seen as benchmarks of

competition enforcement, such as the U.S., have experienced the more traditional industrialpolicy instruments sometime along their histories, and it is not uncommon to find debates amongpolicy makers regarding some form of industrial policy when the countrys economicperformance was less than satisfactory5.

Current thinking on industrial policy and its practice in most countries is quite differentnow from what it used to be in the past decades. Industrial policy today often means, more than aparticular policy, issues that involve the best way to address long-term (or structural) industrialproblems of a particular country. This includes the role of government in addressing such

problems and whether special programs complementary to fiscal, monetary, competition andmacroeconomic policies would be appropriate. In this context, competition policy, instead of anobstacle, should be seen as an integral part of any well-succeeded industrial policy.

4 See McFETRIDGE (1985).5 One example is the intense debate that took place in the U.S. during the first half of de 80s, when U.S. industrieswere losing competitiveness against the Japanese industry (especially in the technology intensive and automobilesectors). As the public opinion claimed for some kind of government action, the Reagan Administration presented anindustrial policy plan, later discarded.

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The problem for both academicians and policy makers is that most of the mainstreameconomic theory fails when applied to industrial policy. Stylized historical wisdom holds thatover remarkably different scenarios, completely different levels of integration betweencompetition and industrial policies - varying from no competition policy along with a stronginterventionist industrial policy, to a strong competition policy combined with the absence ofindustrial policies, and all in between -, may have led to essentially similar industrial

development results.A good old example is the development of railroads in the XIXth century6. In the U.S., a

policy centered in autonomous local communities was the formula for success. Railroads werebuilt in response to local demand and heavily subsidized by local governments. Federal actionwas almost null, except for a brief period (1862-1872) of land-grant subsidization, and for theantitrust measures that came in by the turn of that century. In this case, free initiative andcompetition, with the help of local state subsidies, was responsible for the expansion of railroads.In France, by contrast, prevailing economic and political beliefs were that a centralized publicadministration could produce more rational and effective development. The state agency Corpsdes Ponts et Chausses planned a Paris-centered network and closely regulated private intereststo eliminate competition and ensure a state directed development.

In the midway are British railroads. While U.K. was closer to U.S. for her liberalacceptance of economic progress relying on strong individual initiative under a non-interventionist state, the primary duty of the state has been to prevent rough competition fromundermining the viability of private business. Neither the central state nor the local governmentinitially had much to do with railroads. But when the state finally came into the business, most ofits effort was toward supporting small firms by fixing prices and encouraging cartels that wouldallow weaker companies to survive through cooperative arrangements - i.e., putting asidecompetition concerns in favor of a desired path for the development of the industry.

This particular example shows that in developed countries, different combinations ofindustrial and competition policies were able to lead to similar results in implementing a nation-wide major innovation which was at that time crucial for their economic development.

Supporters of an activist industrial policy usually choose the path of a moreinterventionist role for the government in solving industrial problems and rationalizing policytoward industry. On the other hand, supporters of a more pro-competitive, free-market policyargue that government intervention is already excessive and that it may be part of the problem.They often hold that industrial policy is inappropriate because economic growth can be achievedthrough pro-competitive tools and the enforcement of antitrust rules, among others.

Nevertheless, it is hard to find a single developed country that has adopted strictly one ofthese policy directions to the complete exclusion of the other in its development. Industrialdevelopment paths have consistently been characterized by the interaction (on different levels)between competition and industrial policies, and this relationchip has changed over time.

Taking into account roughly stylized levels of industrial and competition policies adopted

for different countries, it is possible to suggest a taxonomy, as shown below. Industrialdevelopment paths could thus be classified in four broad types, according to the prevailingrelationship between industrial and competition policies7.

6 See DOBBIN, F. (1997).7 One must keep in mind, however, that this taxonomy is not a very rigid one. Most countries pattern of interaction

between competition and industrial policies changed over time, and according to the focus of the analysis.

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Table 1: Types of Interactions between Industrial and Competition Policies

DESCRIPTION EXAMPLES

I Predominance of Industrial Policy.Direct state intervention (as a rule), market protection

and incentives to national companies.

France, Portugal, Spain, Italy(before the E.U.), Korea,

China, India and Asia ingeneral. Also most LatinAmerican countries until the1970s.

II Predominance of Competition Policy.Absence of direct state intervention (as a rule), anddevelopment of an industrial sector in a competitiveenvironment.

US, Canada, Germany,Australia.

III Emphasis in Industrial Policy.There are antitrust rules and a structured competitionpolicy, but for some industries (less developed) there isa non-official exception from the rules (whose

enforcement grows in time).

Japan, Korea, China, India.

IV Coexistence of Industrial and Competition Policies.There are mechanisms of legal exemption for particularsectors.

United Kingdom andEuropean Union.

Source: Own research.

Differences in patterns of competition and industrial policies can be observed both acrosstime and across jurisdictions, illustrating divergences in policy objectives underlying theapplication and enforcement of economic policies over time. It should be stressed that no singleexperience exactly corresponds to any other, so that differences can be found inside each class.For instance, in Japan competition rules are now enforced in the industry as a whole, while in theU.S. there still are exemptions to antitrust rules or government direct actions towards specificsectors.

For this study a few countries were selected. As the objective was to identify differentpatterns of interaction between the two policies, as well as to present experiences both fromdeveloped and developing countries, an additional effort was made to select countries fromdifferent regions which had already gone through some industrialization process8. As expected,Differences differences in competition and industrial policies were observed both across time andacross jurisdictions, illustrating divergences in policy objectives underlying the application andenforcement of economic policies over time.

It should also be borne in mind, that the differences in the framework in whichcompetition and industrial policy interact in developed and developing countries are rathercontrasting. Most industrialized developing economies built their industrial structure under

interventionist regimes and circumstances of high liquidity in the international financial markets.9Competition laws, when existent, were not enforced, and only rarely there were coordinatedcompetition policies as such; usually, competition regulations were restricted to protection of

8 As mentioned before, it is assumed, for the purpose of the present analysis, that there is room for interactionbetween competition and industrial policies. Economies in very early stages of industrial development were thereforediscarded.9See STUDART, R. Dollarization: right issues, wrong questions and dangerous answers. Paper prepared for theSeminar Dollarization in the Western Hemisphere at the North-South Institute; available at http://www.nsi-ins.ca/ensi/pdf/10_studart.pdf

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http://www.nsi-ins.ca/ensi/pdf/10_studart.pdfhttp://www.nsi-ins.ca/ensi/pdf/10_studart.pdfhttp://www.nsi-ins.ca/ensi/pdf/10_studart.pdfhttp://www.nsi-ins.ca/ensi/pdf/10_studart.pdf


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consumer rights or the punition of illegal commercial practices. Industrialized developingcountries, therefore, were led to the implementation of competition policies in rather differentconditions than developed economies, and even among them there are particularities thatinfluenced the nature of the competition laws and the character of the policy implementation.Often they were part of the IMF or the World Bank conditionalities, which pushed mostdeveloping economies to pass competition statutes during the last 10-15 years10, a phenomenon

that was simultaneous to the deregulation and liberalization of domestic trade as part of a globalreform agenda for these economies.

Finally, as in developed countries both industrialization and competition policyimplementation began earlier, it is sensible to draw conclusions mostly from their experience. Inmost developing countries, neither the industrialization nor the introduction of competition havebeen completed, so it can be too soon to get conclusions from their preliminary results11.

2.1. Industrial and competition policies in the U.S.

The United States are the most obvious example of a highly developed economy adoptingantitrust legislation as a prominent part of its national economic policy framework. U.S. antitrust

laws have been a centerpiece of the countrys economic policy for over a century, and itscompetition policy is often taken as a benchmark for assessing policies in other countries.

When considering U.S. market policies attention is necessarily drawn to its wellestablished tradition of free market and strong enforcement of antitrust rules. However, therewere instances in the XXth century when industrial policy mechanisms have been used, eventhough they were not always presented under this particular label.

Since the Sherman Act was passed in 189012 and the current institutional structure wascreated in 1914, competition policy in the U.S. has been lying mostly on two federal antitrustagencies, FTC (Federal Trade Commission) and DoJ (Department of Justice) Antitrust Division,each with its own functions: the latter with criminal enforcement power (price fixing and cartelbehavior) and playing an active role in shaping competition policy, and the former more focused

on structural issues and their implications for consumers13

.In part due to its long history, competition policy in the U.S. is far from uniform. In short,U.S. competition policy has changed, mainly through attitudes towards the relationship betweenthe state and the markets, shifting coalitions behind or against specific policies and changingeconomic environment and theory14. The strong tradition of competition policy in U.S., however,

10According to SINGH(2002), until 1990 only 16 developing countries had formal competition policies. During the1990s, with encouragement and technical assistance from international financial institutions and the WTO, 50countries have completed their competition legislation, and another 27 are in the process of doing so.11 According to SCHERER (1994), it takes about ten years for countries to acquire the necessary expertise andexperience to implement competition rules effectively. Some experiences shown in here have just now completedthis period, as others (the Indian experience, for instance) have just been implemented. Therefore, there is plentyinformation about policy designs and very little information about policy implementation on some countries. This

paper has not, then, very precise evalutations on the policy implementation on Latin America and Asia.12 See FOER, A., LANDE, R. (1999).13 Competition policy is also strongly influenced by private enforcement of the Sherman Act and the Clayton Act,through the advices that private bar and economic consultants do to firms on how to accomplish business strategieswithin an antitrust and competition policy environment. Besides, within a Common Law system as in U.S.,competition policy is also influenced by judges, usually federal and most importantly Supreme Court justices, as theysit in judgment of specific cases.14 Towards the early 1970s it was focused on supervising big corporations and preventing the rise of cartels as a wayto protect consumers and small firms - see McCRAW, T. (ed.) (1997). Their action, though more pragmatic than

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did not prevent the active implementation of industrial policies from time to time particularly inthe building of industries, during depressions15 or whenever economic development wasconsidered more important than competition in some particular market.

Nowadays, the U.S. does not have a coherent, comprehensive industrial policy16. To theextent that the government engages in some economic planning, it undertakes it with a relativelysmall executive office staff of the Presidency, but nowhere is there a sizeable group of people,

having real authority, who make policy regarding the long-term pattern of economic (particularlyindustrial) performance17.

Nonetheless, the country does have an industrial policy in the broader sense mentionedbefore the government pursues many policies that together strongly influence the course ofindustrial performance18. U.S. has, in fact, a long history of industrial policy, which is easilyconfirmed by the extent to which the state variously supported the growth, development, andsustenance of the aircraft, airline, railroad, motor carrier, shipping, agriculture, oil, and bankingindustries.

One of the most impressive examples of how the U.S., besides competition being thegeneral rule, does soften it a little in order to implement industrial policies is the technologicalpolicy implemented through national defense. The defense industry, and the R&D policy

implemented through it, can hardly be considered competitive: it is both an oligopolistic and amonopsonistic market, and yet it differs significantly from the traditional corresponding theories,since in this case buyer and sellers have a mutuality of interest 19. To stimulate R&D the U.S.government has, more than once, proposed R&D tax breaks and looser antitrust laws that permitmore pooling of efforts among companies20.

most academics would prefer, was based in a strong belief in the so-called Structure-Conduct -Performance model,and guided by the two corresponding main indicators, market concentration and profit margins. Antitrust authoritiesdirected their actions towards two main objectives: to promote, whenever possible, market de-concentration and tofight commercial practices that resulted in prices above competitive levels. From the late 70s there was a majorchange in the direction of antitrust policy, when critics from the Chicago School to the former model heavilyinfluenced government action. The focus now was directed to distortions in the competition process, generated by

barriers to entry, information asymmetries and market power. Protection of small firms are no longer relevant, andconsumers were now supposed to protected by efficiency and transparency of the markets. In the beginning of the 90sanother change took place, when antitrust enforcement became a topic in U.S. multilateral agenda. As a result, a broadernormative scope was introduced into traditional competition policy concerns, so as to encompass virtually any governmentaction that could affect competition, like trade and investment policies, regulation, and tax incentives. Present competition

policy is also concerned with the coherence of different public policies.15The National Industrial Recovery Act, for instance, was central to the New Deal recovery effort. It was an attemptto promote economic stability by means of an integrated regulatory framework governing production and pricingacross sectors. Antitrust was largely eclipsed during this period.16The absence of a comprehensive industrial policy is not an accident, but a policy choice, since U.S. economic tradition isknown for its emphasis on free markets and competition. But occasionally the intervention of the government in a

particular industry has been a contentious political issue.17 There are no institutionalized means of coordinating economic programs in more than a cursory way andcomprehensive coverage of all industries, localities, and technologies (but along history one can find a patchwork of

policies intended to fix specific problems).18 A recent example of this kind of government activism was the Clinton economic program, that used taxes,subsidies, and credits to induce changes in the private sector behavior.19 Defense demand is created basically from military requirements for more advanced weapons systems or from newtechnological opportunities, usually developed by a contractor; and the amount purchased is determined by theCongress.20In the U.S., this kind of government action towards technological advances is mostly (but not exclusively) handled

by the Department of Defense, and in particular by the Defense Advanced Research Projects Agency (DARPA).There are also other agencies, as the Department of Commerce and Department of Energy, which also play importantroles in the promotion of new technologies e.g. the research for a highly fuel-efficient automobile or high-

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The general policy view of industrial problems is one of managing aggregate levels ofinvestment, employment, and economic growth and guaranteeing competition. There are,however, a large number of programs, such as those mentioned above, that provide support tospecific forms of industrial development21. It should be emphasized that these options are notincompatible with solid competition policies. In the United States, actually, the state actiondoctrine allows the states to displace competition policy when there exists a clearly articulated

state policy (transparency) that is exercised under strong state supervision22.In sum, there is little interaction between industrial and competition policies in the U.S.

Competition policy prevails over industrial policy, but there are also examples (although notmany) of how this country has been able to adopt industrial policies by softening competitionpolicy if necessary through building or aiding specific industries, either in order to overcomecurrent difficulties, as in New Deal, or to catch up with other countries industries, as did policiesfor the automobile industry in the 1980s, or even to guarantee technological supremacy, as is thecase of current R&D policies.

2.2. Industrial and competition policies in the European Union

Europe has had different experiences with industrial and competition policies. Before theEuropean Union (E.U.), most of its countries already had a complete industrial structure, but farfrom a homogeneous one. In many countries such as Italy, France and U.K. - governmentsdecided to nationalize their basic industries to protect them from crises.

A quarter of a century ago, present E.U. member states were still characterized bycountry-specific patterns or models of economy relations, including the role of the State 23.Some of them (e.g. the French one) were rather distant from the U.S. model of a modern marketeconomy, while others (e.g. the German) were closer. Since then, a major change has taken placein Europe as a consequence of (i) the extension of E.U.-wide economic legislation within theframework of the Common Market, (ii) the delegation of some major policy functions such ascompetition policy and monetary policy to E.U. institutions, and (iii) softer forms of intra-E.U.

convergence through harmonization and community pressure in fields such as privatization andfiscal policy24.As a general overview of the E.U. case, we will highlight very briefly some aspects of two

opposite experiences, the French and the German25, concluding with an outline of the currentframework from the standpoint of the interaction between the different policies.

2.2.A) The German experience

temperature superconductivity (HTS) as does the Office of Science and Technology Policy. The Congress has alsosupported research through a variety of tax subsidies and funding programs and through building facilities andtesting prototypes, particularly in defense and energy projects. Support for R&D is usually justified on the groundsthat private firms tend to underinvest in these activities. Federal support has played a major role in the developmentof the agriculture, aerospace, communications, nuclear energy, and computer industries.21 This country still retains a large margin for discretion: although it has moved away from industrial policy,instruments are still in place. Defense and Research budgets are far more significant than those of the E.U., Japan, orother countries considered to be traditionally interventionists.22 LIANOS (2002).23 See COHEN, E., PISANI-FERRY, J. (2002).24 DOBBIN (1997).25 These experiences are extreme positions of the multiple combinations of industrial and competition policies that were putin practice in Europe. Most of the others can be, with some adaptation, viewed as combinations thereof.

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More than any other Western European country, industrial development in Germany hasbeen marked by political, economic, and social upheavals. The years between 1914 and 1990included the First World War, inflation, the Weimar economic recovery, the Great Depression,National Socialist re-armament, the Second World War, the post-war occupation, the emergenceof the Federal Republic of Germany, and the nation's reunification. With so many economicturnarounds, one would think the government would have a very active role in the economy.

However, Germany is probably the only country in Europe where competition policies arethe most important aspect of economic policies in general. In that country, an effectivecompetition policy is believed to contribute positively to industrial competitiveness, and amongEuropean governments, the German one was the least interventionist since the post-warreconstruction.

There is very little interaction between industrial and competition policy in Germany.While the national government has occasionally played a developmental role in the economy,this type of industrial policy intervention has always been the exception rather than the rule. Onemay find very few examples of targeting sectors and building large companies (nationalchampions) in its case - common practices in countries such as France or Japan.

German competition law the Act against Restraints of Competition [ARC] was

adopted in 1958. It initially focused on dealing effectively with the threat posed by cartels, otheraffiliated groups of firms and trusts to Germany's economic recovery and reconstruction. From itsvery beginning, exempting sectors from competition rules in the name of industrial interests wasnot accepted. In 1973, the scope of the ARC was broadened to include statutory provisions tocontrol anticompetitive mergers, and competition has been the rule in there since then.26

As to institutional structure, the German system is based primarily on bureaucratic andjudicial rather than on Ministerial authority. This may explain the relatively small politicalintervention found in Germany27. The Bundeskartellamt (Federal Cartel Office) is the mainauthority, and within it the authority is extensively decentralized28.

As for German industrial policy, there is no consensus on the role of the national state.One view is that successful experience is attributable to the capacity of industrial companies to

coordinate through intercorporate linkages (particularly with banks); the state, then, would haveplayed only a secondary role in subsidizing the costs of adjustment. A second interpretation isthat the successful industrial development was based on the development of regional economiesin which local and regional government are key actors. Finally, some scholars hold that theGerman success is owed to the increasingly competitive environment and the gradual reductionof the role of national government.

Although no one contests the fact that government played some role, how big it was is themain issue here, but it is undeniable that the German state had at least an enabling role throughthe support of institutions and policies with a generalized impact on industry as a whole,particularly by providing public support for industrial finance and influencing the creditallocation process.

26 Traditionally, behavioral concerns such as the control of exclusionary and discriminating practices of dominant firmshave been given less emphasis in German competition law and policy (see Industry Canada, 1995).27 But there are exceptions. In some cases, explicit Ministerial control is allowed, such as the authorization for the Ministerof the Economy to override particular decisions by the Cartel Office prohibiting a merger.28 Decisions respecting individual enforcement matters are normally taken at the level of Decision Divisions. Suchdecisions can be appealed to the Court of Appeals or further to the Federal Supreme Court (as matters of law).

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In Germany, with the excuse of reconstruction29, state targeting of credit to specificsectors has been limited to low interest loans and loan guarantees for financing restructuringplans, such as in the shipbuilding and steel industries. Also, the state has actively supported thedevelopment of the banking system's capacity to supply long-term finance to a broad spectrum ofcompanies30. In these cases, competition policy was neither left aside nor relaxed the recoveringindustries are subject to it in all its extension.

In Germany, then, it is observed a predominance of competition policy mechanisms overindustrial policy mechanisms. I.e., as a general rule, direct state intervention is not observed onthe German industrial development, as the industrial sector was established in a competitiveenvironment.

Thus, in the taxonomy proposed in the beginning of this section, Germany could be a typeII country31.

2.2.B) The French experience

The French ordinarily claim precedence in inventing the concept of industrial policy, so

important it is in the perspective of economic policies the French government has applied.Competition policy, on the other hand, was not a very strong aspect of the French economicenvironment until it became an imposition from the E.U. Among its countries, even now Franceis one that gives the least importance to competition policy, with many sectors, industries or evenparticular companies exempted (officially or not) from the competition rules.

In order to grasp the basics of French industrial policy model one must not disregard twocritical features of its environment: the very powerful nationalist ideology, which explains manyprotective policies until the present time; and the particularities of its capitalism: as privateinvestment was less than required to launch big companies or new technologies, whenever theFrench government wanted to ensure the countrys presence in key industries it had to financethat choice.

In the post-war period, industrial policy in France was conducted largely within theframework of indicative planning, with emphasis in the construction of a modern industrialbasis32. During the 1960s it strongly engaged in targeting, focusing its favors to few companies ina few industries, corporate national champions. More recently, industrial policy moved awayfrom targeting, trying to substitute horizontal for selective policies.

According to the French government official speech, competition policy is now animportant aspect of national economic policy. Prior to 1975, however, it was largely displaced byinterventionist economic policies that included price controls, extensive subsidization of keyindustries and centrally planned restructuring of firms. Since then, competition has been playing

29 According to S. VITOLS (1997), the German state had a crucial role in the postwar reconstruction, through theallocation of Marshall Plan funds as loans for the reconstruction of key sectors.30 The German state created a number of institutions and programs to boost the supply of long-term finance.31It should be noted, however, that while nowadays competition policies are extremely important among the German

policies, during the countrys industrial development, although the government did not intervene directly in theeconomy, it acted in close association with banks, labor unions, and the local municipalities (see ZYSMAN, 1983,and STREECK, 1992).32Even before the War there were sectors in the French economy that relied mostly in the government for theirdevelopment, like automobiles and aircraft - both developed during World War I in response to massive governmentsubsidies.

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an increasingly central role in French economic policy, and is now well established in the law andpolicy frameworks.

Frances competition authority is the Competition Council33, an independentadministrative authority founded in 1986. A new competition law was published in 2001 - theNew Economic Regulations Act - that, together with the Code of Commercial Law, set thecompetition rules in the country. This Council has only consultive and litigating powers, being

responsible for the final decisions on competition matters. Competition policy guidelines are setby the Direction Gnrale de la Concurrence, an office of the Ministry of Economy, whosechairmen represents the French government in the Council meetings.

Broadly speaking, the French approach to competition policy seeks to provide forappropriate control of anti-competitive mergers and other arrangements, but shows greateracceptance to arguments regarding their dynamic benefits than is evidenced in other jurisdictions.Alternatively, the country has not abandoned government direct intervention on the economy,having still several state companies and a clear government orientation towards industrypromotion (through the Ministry of Economy, Finance and Industry)34.

France, then, chose a pattern of interaction of industrial and competition policiescharacterized by the predominance of industrial policy and by direct state interventions combined

with mechanisms of market protection and incentives to national companies to develop itsindustrial sector. This behaviour, however, has been changing in the last two decades notably inorder to adjust to the E.U. competition rules.

France would thus be a type I country, with national champions in many sectorsbenefiting from the non-application of any kind of competition policy while they were promoted.The interaction has been changing in the last two decades in order to adjust the French pattern toE.U. rules.

2.2.C) Industrial and competition policies in the European Union

Regarding competition and industrial policies as instruments of economic policy, the

European Community provides a model which differs from the ones adopted by its memberstates. The state aids control in the European Union can be viewed as a combination ofcompetition rules and industrial policy regulation, placed in the hands of a single agency, theEuropean Commission (EC)35.

As to competition policy, it shows an extremely high degree of integration with broadereconomic policy goals. From its inception, EC competition policy has been deliberatelyemployed as an important instrument to foster the integration of the European market. ECcompetition policy has a wider scope, encompassing state aids to industry that distortscompetition as well as business practices36. In addition, the Commission publishes regular reportson the incidence and effects of these aids.

E.U. competition policy aims at preventing excessive market power and other distortions

applying to intra-E.U. trade. In practical terms, no attempt is made to interfere with nationalcompetition policies as long as they relate only to domestic competition and do not have anappreciable impact on actual or potential trade between E.U. member states.

33 Before it there was the Competition Commission (Commission de la concurrence), which was created in 1977 as areplacement for the Technical Committee on Cartel Agreements and Dominant Positions.34 This pattern is gradually changing to adapt the E.U. rules. The transition, however, is not yet completed.35 LIANOS (2002).36 Articles 90 and 92 of the Treaty of Rome deal with state ownership and aids to industry. In principle, state aids andsubsidies are prohibited by the Treaty, but many derogations were allowed by the Commission since 1988.

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The EC has also industrial policy powers, granted for the first time by the MaastrichtTreaty. In 1989, the role of the Commission in the control of industrial concentration wassignificantly enhanced by a new Council regulation. At that time, there was a discussion on howindustrial policy concerns could be taken into account in competition policy decisions. However,the Commission case-law has consistently refused to consider potential trade-offs betweencompetition and industrial policy concerns. Over the years, the predominance of concerns

relating strictly to the competitive functioning of markets has been confirmed by a series of cases,although there are some exceptions.

At the national level, industrial policy in the E.U. is subjected to the mandatorycompetition rules of the Community. These rules dictate neither goals nor instruments todomestic industrial policies, but define some preconditions to such policies. The rules forindustrial policy in the E.U., then, act in a prohibitory way: they dictate what countries cannot do,and therefore the EC uniformized to some extent national industrial policies.

Taking Europe as a whole, the EC aims simultaneously to ensure full competition withinthe member states while also trying to promote European companies to compete in the globalmarket. In fact, industrial policy is not explicitly dealt in the E.U. treaties, although there aresome examples.

Direct E.U. subsidies tend to go mainly to R&D, through various programs designed toincrease the level of technological collaboration and co-ordination across member states. Anexplicit commitment to encouraging R&D became one of the foundations of the Single EuropeanAct (SEA) in order to narrow the perceived technology gap between E.U. countries and US andJapan. Industrial policy in the E.U. also tends to favor certain sectors, with specific policies forareas such as textiles and aircraft.

The guidelines for state aids to particular industries are also determined through anegative approach: article 87 of the Treaty of Rome determines the incompatibility of state aidswith the common market principle, but it also defines the exceptions allowed - among them,authorizations for incentives to particular regions or economic activities. In practice, most ofthem are given to regional incentives, and although competition is the rule, there are also

authorizations for horizontal industrial policies (incentives for sectors are uncommon, but theyalso exist). This kind of discussion, however, is not held inside the Competition Commission;documents dealing with industrial policy directives are often found in other departments37.

A conclusion could be that there is some interaction between industrial and competitionpolicies within E.U., but one in which competition delimits the scope of industrial policy. InE.U., industrial policies are not a discarded practice there are still a great number of documentsreferring and discussing its implementation, and most of them do not put industrial andcompetition policies in antagonistic sides, but rather present them often as complementarypolicies towards a particular countrys development38.

2.3. Industrial and competition policies in Asia

The Philippines were the first Asian country to introduce a competition law (under U.S.rule in 1925), followed by Japan in 1947. Most countries, however, enacted competition laws inthe 1980s and 1990s, adopting antitrust rules as a combined set of competition and unfaircompetition laws regulating business behavior.39

37 Some examples are CCE (1994), CCE (1994a) and CCE (1998).38 This particular approach is presented in the Commission Paper CCE (2002).39 See Symposium on APEC Competition Policy, Washington U. Global Studies L. Rev., V. 1, Nos. 1 & 2,Winter/Summer 2002; individual articles available at http://law.wustl.edu/Publications/WUGSLR/

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The first Asian experience to be examined is Japan. This country has an interestingexperience both for its successful industrialization and growth strategy as for its singular type ofpolicy interaction. Then, the Chinese and the Korean experiences will be briefly examined, aswell as the infant Indian competition policy.

The four Asian experiences have distinct patterns of interaction between industrial andcompetition policies. In Japan the industrial development was characterized by the emphasis on

the Industrial Policy associated with the existence of antitrust rules and a structured competitionpolicy that comprised non-official exceptions for some industries. Today, however, the countryseems to have chosen a pattern based on the coexistence of industrial and competition policies.China and India, on the other hand, have shown a predominance of industrial policies based onthe direct state intervention, with some (recent) competition concerns. Finally, Korea seems to begoing through a changing process towards the Japanese path of interaction between competitionand industrial policies. As will be shown, Japan would be a type III country in our taxonomy,while China and India are type I and Korea seems to be approaching a type III interaction, whereantitrust rules and a structured competition policy co-exist with non-official exemption for someindustries.

2.3.A The Japanese case

Japan had coherent and systematic industrial policies over many decades. Nationalgovernment has played a critical role in formulating and implementing policies, but such role haschanged over time according to each stage of industrialization.

Early in the twentieth century Japanese government took the initiative to develop keyindustries and to build an infrastructure to foster industrialization, being an active part inintroducing advanced technologies, setting up modern industrial plants and infrastructure, as wellas educational systems and training centers. As industrialization proceeded, the private sectorbegan to take risks and initiatives, and the economic policies towards industries changed with it.

For most of the post-war years, the chief goal of Japans economic policy has been

development and growth, and free competition has sometimes been seen as inconsistent with thatgoal. Indeed, although Japan has had a competition law since 1947 (Act Concerning Prohibitionof Private Monopolization of Fair Trade, known as the Anti-Monopoly Act AMA) throughoutthe 1960s, 1970s and 1980s, its competition policy was largely subordinated to policiespromoting industrial and trade objectives40. Important sectors of the Japanese economy weredominated by officially accepted cartels.

It is widely known that most of the credits for the miracle of Japans post-war recoveryand its rise to the status of an economic superpower go for the Ministry of International Tradeand Industry (MITI) and its interventionist industrial policies. Competition policy was assignedto a separate agency, independent of the government but politically not strong enough to promoteits policies effectively the Fair Trade Commission (FTC) as compared with the ministries that

regulate industry and investments. Despite fostering its national industry by suspending the

40According to OECD(1999), while antitrust legislation existed since 1950, it went essentially unenforced. Manysectors had centrally guided investment and there was a proliferation of explicit exemptions and implicit guidance. Itwas not until the end of the 1960s that the FTC tried to block a merger that another ministry promoted, and only inthe 1970s that it applied the laws criminal punishments against price fixing (in response to the oil shocks). Ingeneral, FTC actions were an exception in the Japanese economic development: in the 1970s, it took an average of34 formal actions per year, and 11 in the 1980s.

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competition law effectiveness, however, Japan adopted alternative policy measures aimed atpreventing rent-seeking behaviors41.

Nonetheless, the Japanese system of competition law and policy and its relation to broadereconomic objectives have changed considerably in the last decade. Mostly in response tointernational pressure - particularly in trade disputes with the U.S. 42 -, Japan adopted severalmeasures to strengthen its competition law and enforcement capabilities, adopting explicit

commitments to increase the resources and the visibility of competition enforcement. As a result,in 1991, the FTC made a formal cartel prosecution for the first time in seventeen years. TheAntimonopoly Law now looks rather similar to the Western model, and the FTC has improved itsenforcement record.

Industrial policy in Japan, at the same time, changed its focus from protective policies topolicies toward competitiveness enhancement thus more compatible with competition rules43.Until now, however, although there is no general exemption from the competition law, the lattercannot reach effectively most of the governments actions, as competition authorities only dealwith voluntary action (so, if a specific statute governs an industry, conduct in accordance with itor an order properly issued under it does not violate the law). A recent development worth notingis the limit set by FTC to potential anti-competitive effects of administrative guidance through

guidelines indicating which conducts violate competition and suggesting Ministries to consultwith the agency before adopting sector specific measures.

Japan may now be heading to a type IV kind of interaction between industrial andcompetition policies.

2.3.B Industrial and competition policies in China

Chinese economic policy can be characterized by high levels of intervention and theintense use of control mechanisms by the government, and until now central planningmechanisms can still be identified. An industrial policy has been formulated at the national leveland implemented both at the national and local levels in almost all sectors of the Chinese

economy44

.As a socialist economy and also as a result of its central planned economic policies, Chinadid not have a competition policy until the early 1980s. Even nowadays, the country has no anti-monopoly law: provisions controlling monopolies and anticompetitive conducts are distributedamong different laws, rules and regulations45. Nevertheless, even a cursory look at the Chinesecompetition policy (or the absence of it) reveals that what the government calls competitionrules are, in fact, an assemble of illegal commercial practices prohibitions only in some cases

41 AMSDEN, A., SINGH, A. (1994) argue that the Japanese government pragmatically managed competition duringthe 1950s and 60s in domestic key industries. Additionally, according to EVENETT (2005) most of MITI policiesduring this period were characterized by a bias against competition, implemented through the agencys use ofadministrative guidance to firms and industry associations.42 The perceived laxity of the enforcement of competition law in Japan was a major concern pursued by the U.S. inthe Structural Impediments Initiative (SII) a set of bilateral negotiations initiated in 1989 to address outstandingobstacles to trade and investment between the two countries.43 Its industrial policy evolved from sector promotion, thus excluding the application of competition policy, toward

policies focused on innovation issues, where competition policy is better applied and accepted by other governmentagencies.44 See LUI, Ling, Chinas industrial policies and global business revolution: the case of the domestic applianceindustry.Asian-Pacific Economic Literature 19(1), 86-106, May 2005.45 LIN (2002). The most important are the 1980 Regulations on Development and Protection of Competition, the1993 Unfair Competition Law and the 1998 Price Law.

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related to competition. There is no single bureau accountable for competition in China, and thereis also no evidence of an active competition policy as defined here. Chinese government has beendiscussing a Monopoly Act for years now, even though there is no consensus about how tointroduce further competition46. In sum, there is no interaction between industrial and competitionpolicies, but rather a complete suppression of competition rules under a strongly interventionistcentral planned industrial policy, replacing the former role of central economic planning.

2.3.C Industrial and competition policies in Korea

The Korean experience, both in industrial and in competition policy, is highly similar tothe Japanese one. Korea had a strong, active industrial policy which dominated competitionpolicy as the government encouraged and subsidized the growth of large corporations, thechaebol47. As the national goal was fast economic growth, industrial and trade policies targetedtowards maximizing local firms investment and market share in the global market took priorityover other policies. On the other hand, although Korea has had for a considerable period of timean official competition policy, as well as competition laws, as a result of its lax enforcement thecountry has reached one of the highest levels of industrial concentration in the world 48.

As the official government discourse concerning Korean economic policy began to shiftin the early 1980s, Koreas competition policy began to evolve. Its goals were, nevertheless,broad enough to encompass programs like those of the previous period (structural interventionand regulation) as well as those of market-based reform.

The current antimonopoly law is the 1980 Monopoly Regulation and Fair Trade Act(MRFTA), and the responsibility for its enforcement was given to a new agency, the Korea FairTrade Commission (created within the Economic Planning Board) 49. Even though it was designedto mark a significant departure from the tradition of a government-led economy to a marketeconomy based on private initiative and competition50, the price control tradition and experienceengulfed the MRFTA early application, as price stability was still a strong policy concern.51

In 1990, decision-making in competition law-related matters was shifted from the

Minister of the Economic Planning Board to the KFTC Chair, and in 1994 the governmentabandoned the five-year plan system and abolished the Economic Planning Board, merging itwith the Ministry of Finance into a new Ministry of Finance and Economy, from which theKFTC emerged as an independent body reporting directly to the Korean Prime Minister.

At present cartels are still tolerated and exceptions to the competition laws and regulationsare current practices in the Korea52. In addition, several aspects of Korean competition policy are

46 XIAOYE (2002).47 CHANG (1994).48 SINGH (1999) holds that in the era of state-led economic growth, several markets in Korea were controlled,directed, and protected by the government.49 The MRFTA covers all traditional issues of competition policies, like anti-competitive M&As, cartels, resale pricemaintenance, monopolization, attempt to monopolize and exclusive transactions. In addition, the law addressesunfair trade practices, undue subsidies/debt guarantees/equity investment among affiliates of large business groups(Korea Fair Trade Commission -http://www.ftc.go.kr/eng/laws/statutes.php).50Ibidem.51 According to WISE (1993), the government paid special attention to prices in concentrated industries, wheremarket leaders were to report price changes in advance pursuant to informal administrative guidance, not legalobligation. The Economic Planning Board monitored prices until 1993, and reportedly used the process to stabilize

prices.52 In 1999, the Omnibus Cartel Repeal Act eliminated the statutory authority for 20 cartels that were excepted fromthe KFTC actions, but although some of these were effective immediately, others will be phased in over a period of

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designed not to promote competition, but to protect the interests of small and medium sizedbusinesses53. Furthermore, while in principle the MRFTA applies to all industries, and exceptionsfor a few industries were abolished in 1999, some cartels remain protected by particular statutes.

In 2003 the Korean government made another attempt to enforce competition by laying aThree-Year Market Reform Roadmap as a proposal for a more transparent market economy. Inorder to help the implementation of the Roadmap, the MRFTA and its Enforcement Decree were

revised and entered into force on April 1, 2005 with three main objectives: promotion of marketcompetition, improvement of regulation on large business conglomerates and strengthening ofmarket self-regulation.

The Korean competition policy at present is a mix of competition concerns and otherones54. Mechanisms guaranteeing competitive markets are still being implemented, which leadsone to conclude that there are no identifiable competition policy results to analyze in the Koreanexperience, since market competition has been the exception and prices (as the economy ingeneral) were strictly controlled by the government. The country seems, however, to be nowfollowing the path Japan has chosen, i.e. to enforce competition rules selectively through time.

2.3.D Industrial and Competition Policies in India

Like Korea and China, India had its government traditionally taken a significant part inindustrialization, trying to guide industrial development through centralized planning andindustrial policy measures, such as protecting and/or subsidizing some industries55. The 1951Industrial (Development and Regulation) Act (still in force) empowers the State to control thedirection and pattern of public and private investments.56

Trying to reach the economic results achieved in East Asia, in 1991 India introduced aneconomic reform the New Economic Policy, or the New Industrial Policy that covered a widerange of areas57, adopting a late import substituting industrialization strategy and traditionalindustrial policy measures which were afterwards softened by the increase of competition,introduced by trade reforms that enhanced import competition58. Nowadays the countrys

industrial policy objectives are mostly reduced to economic growth59

.India had a competition law the Monopolies and Restrictive Trade Practices (MRTP)Act that was applied by the MRTP Commission ultimately as a barrier to import competition 60.

years.53A justification often presented for the controls on the chaebols is to protect small business. Also, among the manyexemptions from the MEFTA application, the most important ones regard the programs to protect small and mediumsized businesses (not related with an explicit industrial policy).54 Such as consumers rights, development for small-and-medium-sized enterprises, and controlling unfaircommercial practices.55See SHARMA, JANSSON and SAQIB (1991).56 CHAKRAVARTHY (2004).57 There were measures seeking the withdrawal of the state from several economic activities, the gradual

privatization of public companies, the implementation of open-door policy measures e.g. the elimination of importquotas on raw materials (characterizing a shift away from the protective industrial policy) and policies concerningforeign trade, foreign investment (relaxation of the restrictions on the inflow of foreign capital), and technologytransfer (PARK, 2002).58 BHATTACHARJEA (2004).59 According to the Department of Industrial Policy & Promotion website ( http://dipp.nic.in/), the objectives of theIndustrial Policy are: i) to maintain a sustained growth in productivity; ii) to enhance gainful employment; iii) toachieve optimal utilization of human resources; iv) to attain international competitiveness and v) to transform Indiainto a major partner and player in the global arena.60 BHATTACHARJEA (2003).

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In 2002 a new Competition Bill was passed61which created a Competition Commission. From anantitrust standpoint the new law seems rather incoherent, as it gives the Commission powers totake action against restrictive trade practices (such as cartels) by restraining imports, andexpressly allows firms that contributes to economic development to cause adverse effects oncompetition62. The same argument is considered when examining the criteria for determiningwhether mergers or acquisitions have adverse effects on competition. Furthermore, since

development (like the public interest) can be considered a matter of subjective assessment,these provisions allow the Indian government to circumvent the Competition Bill by arguing thecontribution to economic development as a justificationfor allowing anti-competitive actions.

Finally, the Competition Bill introduced exceptions/justifications into Sections 3 and 4that can also bring anti-competitive interpretations: for instance, in section 4 it excludes from itsenforcement unfair or discriminatory conditions or pricing, including those considered predatoryprices, if they are adopted to meet the competition, i.e. to match rival offers.

When the 2002 Competition Act was published, the question of whether or not it wassimilar to the old law in substance (though not in form) was raised, so not-so-pro-competition itseemed. The publishing of the Competition Act was preceded by intense discussions on its formand content, including the subject of the protections to the domestic industry as well as the

relationship of industrial policy, competition policy and the economic development objectives 63,and it was determined that there ought to have a transition period during which theimplementation of competition policy/law was done gradually. The Indian Government decidedthat the Competition Act would be introduced in phases: during its first year (2003), theCompetition Commission would carry out only competition advocacy functions (and the oldCompetition Law would remain effective); on the second year some provisions would becomeeffective, and that process would continue until all the Competition Acts provisions becameeffective.

The interaction between competition and industrial policies in India, as briefly shown, hasbeen very limited64. Industrialization and growth have been major policy goals in the country. Asa result, industrial policies have been predominant over competition policies until recently. In the

1990s this position began to soften, as trade and competition policies became part of the officialeconomic concerns.Presently, the results of the 2002 Competition Bill are not clear, but the existence of active

industrial policy mechanisms combined with the laws exceptions to anticompetitive practicesindicate that competition does not seem to be considered a priority by the Indian government,thus putting the country in a type I interaction between industrial and competition policies.

2.4 Industrial and Competition Policies in Latin America

Although legal prohibitions of monopolies and anticompetitive conducts can be found inmany Latin American countries since the late 1850s65, competition policy was not a government

policy in these countries. Competition regulations were regarded only as a means to ban someanti-commercial practices, while state monopolies and price controls were widely used as

61 The Indian Parlament enacted the new Competition Act in December 2002. The Act, however, receivedpresidential assent on January 13th, 2003 (CHAKRAVARTHY, 2004).62Ibidem.63 CHAKRAVARTHY (2004).64 CHAKRAVARTHY (2004) states that Too much of the economy is still denied access to free market principles:command and control is still too prevalent (page 276).65 Mexico passed a statute that prohibited monopolies and monopolistic practices in 1857.

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mechanisms of both industrial and macroeconomic policies. Until recently competition was notpart of any structured policy, and had very little enforcement in Latin America.

Since the late 1980s and along the 90s a transition not yet concluded - took place inLatin American NICs from import substitutive industrial policies towards horizontal industrialpolicies, compatible with the conditions imposed by the IMF and other multilateral organisms66.These countries had similar development paths during the last decades: most of them adopted

import-substitution industrial policies, went through macroeconomic crises during the 1980s anddirected government policy efforts to stabilizing the economy. Coordinated industrial policieswere abandoned and among the reforms that were implemented was the creation of a well-equipped competition system.In the following pages we will briefly examine the experiences of Brazil, Argentina, Chile andMexico. These experiences show, from the interaction between competition and industrialpolicies point of view, a more homogeneous pattern than the Asian one. These countries had theirindustrial development until de end of the 1970s based on the predominance of industrial policyover the competition policy (inexistent in most cases), with state investments, market protectionand incentives to national companies. Nowadays Latin America seem to They were all type Icountries67 until the end of the 1970s and seem now to be in a transitionprocess path towards the

development of na industrial sector in a competitive environment.to type II countries68.

2.4.A Mexico

Although prohibition to monopolies and monopolistic practices was introduced in Mexicoin the late 1850s, as noted before, it was nothing like an effective competition law. As virtuallyevery other Latin American NIC, Mexicos economic policy was marked by traditionalprotectionist industrial policies from the end of World War II to the 1980s, directed at building anindustrial structure by means of import substitution, until severe macroeconomic restrictionsparalyzed the state coordinated intervention in the late 1970s. After the 1982 debt crisis,economic policy changed and the country adopted new economic policies 69 from the middle of

the 1980s. Industrial policy since then benefited from the growth of export oriented maquilas(mostly in the automobile and electronic industries), shifting towards an export specializationmostly related with multinationals that integrated their manufacturing to the U.S.70.

Competition policy was introduced in Mexico as part of these reforms. The starting pointwas the adoption, in 199371, of the Federal Law of Economic Competition (LFCE) and creationof the Federal Competition Commission (CFC), an agency attached to the Ministry of Economy

66 Many countries in Latin America had, for a period, military governments adopting the industrialization throughindustrial policy path. Redemocratization occurred simultaneously to legal and institutional changes whicheventually included a new set of competition laws as part of a widespread movement of privatization, deregulation,and financial liberalization (SINGH, 1999) which reinforced the need of a competition policy.

Some of the trade agreements signed by the Latin American governments have very precise considerations aboutcompetition policies. Given this, it should be noticed that many changes were driven by the opening up of theeconomies and the pressure of international competition.67 Predominance of industrial policy, with direct state intervention in key sectors, market protection and incentives tonational companies.68 Predominance of competition policy, with little or no direct state intervention and development of the industrialsector in a competitive environment.69 Including trade and financial liberalization, industrial deregulation and privatization.70 RUBIO (1992).71 It should be noted, however, that although the Competition Law was published in 1992, its regulation was only

published in 1998.

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but with technical and operational autonomy72. After the recovery from a financial crisis andeconomic recession, in 1995, a National Development Plan was set together with sectorexceptions to the trade and competition reforms. In addition, an Industrial Policy and ForeignTrade Program was created aiming at the coordination of public and private measures ontoselected industries73, focusing on specific issues requiring government intervention, such as smalland medium sized companies and regional development.

Industrial policy in Mexico is now in charge of the Secretary of Economy, and its aim isto enhance industry competitiveness, under NAFTA and WTO constraints. It is devised not toconflict with the competition policy objectives acknowledged in the LFCE74, namely: theprotection of the competitive process and of free market access by preventing monopolies,monopolistic practices75 and others. A particular feature of Mexican competition regulations isthat the Competition Commission is responsible for determining which economic agents mayparticipate in any privatization procedure. Specific powers are granted to the Commissionregarding competition conditions in these markets76.

There are no explicit exclusions in the competition law, even for sectors subject toindustrial policy incentives (as they are not, in principle, incompatible under the Mexican law).According to the OECD (2004), however, there is not a strong general support for competition

policy either. Certain deficiencies in statutory authority and judicial review processes77 constrainthe CFCs ability to address anticompetitive conditions effectively. Besides, the absence offinancial autonomy subjects to some extent its decisions to the government.

Until the 1970s, Mexico was, in sum, a type I country, while after the reforms it seemsto be driving to a type II interaction between policies.

2.4.B Brazil

From the end of World War II until the 1980s Brazil adopted an import substitutionindustrial policy that was able to build an almost complete industrial structure. Particularly duringthe military governments, this strategy led to very high average growth rates. Economy was

tightly controlled, through mechanisms including price and wage controls. In addition, majorindustrial firms either belonged to the state or were private monopolies or at least veryconcentrated oligopolies accepted or even induced by the government.

Although there was a law concerning competition (as well as a Competition Commission- the Administrative Council of Economic Law, CADE) since 1962, it mainly dealt with unfaircommercial practices. As the law was not applicable either to state controlled industries or toregulated sectors the core of the industry, in a word -, competition provisions were not enforcedexcept for very few cases of abusive pricing.

In the 1980s, however, Brazil went through severe macroeconomic problems, reachingextremely high inflation rates. Economic policies since then concentrated on stabilizing the72 CFC website:http://www.cfc.gob.mx/73 Secretary of Commerce and Industrial Promotion: http://www.secofi-siem.gob.mx/portalsiem/74http://www.cfc.gob.mx/contenedor.asp?P=Results.asp?txtDir=http://xeon2/cfc01/Documentos/75 Anticompetitive practices are classified as either absolute (prohibited per se) or relative (requiring an efficiencyanalysis). But neither monopoly nor abuse of dominance are dealt with expressly.76 In regulated infrastructure sectors, a favorable opinion from the Commission is necessary for those interested inconcessions or licenses issued by regulators. The Commission can also determine whether or not the regulators mayimpose price regulations and access controls (as well as defining if and when, due to market changes, effectivecompetition may be restored and end the regulatory controls) and to address possible competitive effects of proposedchanges to federal policies or new laws proposed by the government.77 CFCs decisions can always be subject to judicial review.

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economy, and other policies, such as industrial policy, were unable to succeed. From 1990 on,Brazilian industrial policy switched towards a more liberal and less state-led direction, basedmainly on horizontal policies, enhancing competition, a trade reform cutting severely importbarriers, and promoting competitiveness (which was not fully accomplished). Price stabilizationfinally succeeded in 1994, but by then all attempts at implementing a coordinated industrialpolicy had been virtually abandoned, while economic policy was reduced to sustain economic

stability, mostly through restrictive fiscal and monetary policies. At the same time, a newcompetition law was passed (Law n. 8.884/9478).

Competition Law enhanced CADEs powers and made it an independent agency. It alsodefined the forbidden anticompetitive conducts, imposing far more severe penalties than before.Additionally, two additional agencies were created: the Secretary of Economic Law 79 (SDE), andthe Secretary of Economic Monitoring80 (SEAE). Not even regulated sectors are exempted fromthe competition law81, while there is no case yet of an industrial policy explicitly conflicting withcompetition rules82. Along with such changes in the competition institutions, adjustments werealso made in government competition policies over time. When traditional (sector-specific)industrial policy mechanisms were abandoned, competition was presented as part of combinedpolicy tools to promote innovation and competitiveness in industry, and therefore competition

policy gained importance.According to HAY (1998)83, industrial policy now aims to correct market failures with

policies which operate to facilitate the functioning of markets, rather than to substitute

nonmarket methods of allocating resources, mostly through financing mechanisms. In 1995, theCardoso government issued a policy document84 delimiting a new pattern of growth for theindustry, which is adopted until the present, whose intention is to create the conditions that willenable Brazilian firms to make the transition from the defensive strategies dominant in the initial

phase of trade liberalization to more assertive strategies based on increased productivity andtechnological innovation85.

Brazil, thus, also directed its policies from a type I (until early 1980s) arguably to atype II interaction.

2.4.C Argentina

Argentina, as its neighbors, adopted import substitutive industrial policies similar to thoseof Brazil and Mexico, including strong state intervention, the protective barriers and subsidies,that lasted until the 1980s.

78 Further information on the Brazilian Competition System can be found in the CADEs website:http://www.cade.gov.br/79 The SDE is an agency of the Ministry of Justice responsible for

competition policy and industrial development - mario possas & heloísa borges (v4)

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