Again: competition law? Maybe.

(Remarks at the 1st National Competition Conference, Philippine International Convention Center, Manila, Philippines; 09 December 2014)

Good morning.

And thank you for inviting me to participate in today’s discussion on “Competition Policy and Regional Economic Integration”. Indeed, prevalent in today’s mind would be the subject of ASEAN integration. As it should.

With countries touted as interconnected and technology perpetually advancing, nevertheless, most international trade remain affected significantly by geography. And thus ASEAN will always play, should always play, an important part in the formulation of Philippine economic policy.

Competition policy is said to constitute a vital cog leading up to ASEAN integration by 2015. And members are “endeavored” to introduce competition policy and legislation by that year to “ensure a level playing field and to foster a culture of fair business competition for enhanced regional economic performance in the long run.”

It is worth exploring, however, the thought that before the Philippines indeed contribute to enhancing regional economic performance that its own economic interests – both in the short and long term – be solidified. And perhaps it is in that light that we best look at competition policy and legislation.

The trouble with assumptions

One fundamental problem with present discussions on competition law is the implicit reliance on this one assumption: monopolies are bad and government is the solution. But note, not even our Constitution see monopolies with that perspective: the “State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.” (italics supplied)

As my own newspaper BusinessWorld reported (Competition Law Urged, 28 August 2013) on the East Asia Forum on competition law, the consensus seemed to be that “a competition policy is considered important for a country to grow and consider itself an advanced economy.” Furthermore, “competition law should also be separated from politically motivated industrial policy as the latter allows the government to choose which industries to champion instead of letting natural competition occur in the market.”

Urging must be made to re-examine the assumptions on which such assertions are made. It is not dogma that monopolies are inefficient and stifles innovation. And because of the way today’s economic system is, with globalization and technology, the probability of a new entrant, whether locally or elsewhere, breaking in will always serve as an impetus to improve products or services.

Even claims related to predatory pricing need not go unexamined. Predatory pricing can work if the “predator” is willing (and able) to suffer deep financial losses and even then such would only be effective if the market itself is inundated with regulations that exempt, protect, subsidize current players.

Even declarations like “all advanced economies have a competition policy” should be rendered suspect. Simply because we’re not an “advanced economy”. Not yet anyway. Which should tell you a lot about the wisdom of importing and imposing a regulatory framework tailored for countries whose circumstances are not similar to the Philippines.

Indeed, the logic of the foregoing assumptions seems to be is that to further regulate the market will set it free. But we’ve known from trade policy history that such never benefits consumers and that protectionism has generally harmed the economy. And we’ve known from trade policy history that monopolies are created precisely because of regulations: that such regulations before had to do with tariff barriers and subsidies and now identified as monitoring and review really is of no difference.

A question of necessity

And then, there is the question of necessity. Or, more accurately, the degrees thereof. At the outset, let us get this straight: to agree to “endeavor” to have a competition law by 2015 does not mean we should have a competition law by 2015. The only deadline the Philippines must consider at this stage is its own interests and the welfare of its people.

Reference has been made (here and elsewhere) of the 2014 Economic Freedom Index. As its name indicates, the Heritage Foundation’s study measures a country’s openness to trade, economic mobility, and prosperity.

The Philippines is currently ranked 89 (out of 186 countries), although the same is said to be an improvement by 1.9 points. Amongst Asia-Pacific countries, the Philippines placed 16th out of 42. Overall, the Philippines is considered “slightly below the world average” or “moderately free”.

Of particular interest is the Index’s category of “Rule of Law”. For the Philippines: “Corruption and cronyism are rife in business and government, with a few dozen leading families holding an outsized share of wealth and political power. Judicial independence has traditionally been strong, but the rule of law is generally weak. A culture of impunity, stemming in part from a case backlog in the judicial system, hampers the fight against corruption. Delays and uncertainty negatively affect property rights.” In this regard, it is to be noted that as of 2010, Vietnam has overtaken the Philippines in terms of lessened corruption and is currently three ranks higher.

The Economic Freedom Index goes on to discuss ease of doing business or “regulatory efficiency”, noting that in the Philippines “launching a business takes 15 procedures and 35 days.”

The foregoing makes informative reading when set alongside the World Economic Forum’s 2014-2015 Global Competitiveness Index.

The Philippines certainly made improvements, ranking 52 out of 144 countries. However, the data seems to give the impression of the huge role that the private sector played in our improved ranking.

One can see this in our high scores in “business sophistication” and market size (which perhaps can be related to the fact that the Index declares our population to be at 97.5 million, with a substantial chunk of that, it must be added, belonging to the youth sector – more on this later). High scores in innovation and financial market complement this.

However, what is telling are the areas where the Philippines rank lowest: infrastructure, corruption, health and primary education, ease of starting a business, inefficient bureaucracy, and wage determination, hiring and firing procedures, and redundancy costs.

The media trumpets Philippine improvement in one pillar: “institutions” (rank: 67, formerly 79). But even then, when broken down, one sees that it is private institutions that gave us that higher score (at 48), with public institutions at 75. Two additional figures worth noting in this regard: judicial independence (77) and transparency in policymaking at 85 (and which probably highlights why a Freedom of Information Law can help attain better competitiveness for the country).

Nevertheless, the undoubted key for whatever prospects that may open to the Philippines is in education. There is one striking Philippine statistic that everyone should be aware of and that is in the area of demographics: Filipinos 30 years old and below comprise around 70% of the population (with those below 14 years at 35%, with the median age at 22.9 years old). Those at 65 years old comprise only about 4.1%. The future of this country quite simply depends on how well that 70% is educated.

In this regard, let us take note of The Times Higher Education World University Rankings 2014-2015, which declares itself to be “the only global university performance tables to judge world class universities across all of their core missions - teaching, research, knowledge transfer and international outlook. The top universities rankings employ 13 carefully calibrated performance indicators.”

The usual suspects are there: Cambridge and Princeton definitely (as well as some school called Oxford). From the Asian region, the list is filled with Japanese, Singaporean, Hong Kong, South Korean, Taiwanese, Indian, Israeli, Turkish, Saudi Arabia, and Thai schools.

And yet (although one is free to ignore the rankings for whatever excuse) not one of our schools joined the list of top universities. Not even in the “looser” Times Higher Education World Reputation Rankings, which is based on “nothing more than subjective judgment”.

Relate the foregoing with recent figures indicating that teenage pregnancy in this country rose by 70% in the past 10-year period (114,205 in 1999 to 195,662 in 2009). 2010 figures show 206,574 of such pregnancies. Data from the National Youth Commission show that the Philippines is third highest in Southeast Asia and among the highest in the ASEAN region and the only country where such number is increasing.

Furthermore, of the almost 3 million Filipinos currently unemployed, 48.2% are within the 15-24 age group, with 29.9% from those 25-34 years old. Most of them are high school graduates.

Also disconcertingly, 13-14% of all registered marriages are among teenagers below 20 years old while. On the other hand, perhaps not coincidentally, there is also a rise in annulment cases (records indicate a 100% increase in the past 10 years). Add to that the increasing incidences of rape.

Why are these numbers important in relation to our economy? Because the basic economic unit and source of productivity are people. And nothing develops people better than a strong family unit.

Potrykus and Fagan tell us that: “It is worth emphasizing that though economic production generally, and growth particularly involve three components, economic enterprise is a human activity. Human beings, by the measure of growth accounting, contribute over half of what is valuable to production. Only one third of growth may be attributed to non-human, physical capital. Domestic production is affected massively by the human component’s contribution.”

It bears worth pointing out that despite ASEAN integration being packaged as turning ASEAN into one big “production base”, the Philippines nevertheless is also hinging its strategy on expanding our services industry. But services require people. And people need to be educated and trained.

To further press the matter, while the Global Manufacturing Competitiveness Index recognized the importance of infrastructure, the economic, trade, financial and tax system, and the rule of law as drivers of competitiveness, the biggest driver of competitiveness and economic growth is, you guessed it, a country’s people: “the availability of high quality human talent will always remain in the top set of competitiveness drivers.”

And this is key for the Philippines: Demographics, more specifically aging populations, will have a significant impact on market attractiveness over the coming decades, with some nations like Japan, and even China, despite its large population, significantly inhibited by their aging populations and others, including the U.S. with favorable population age demographics gaining the upper hand as time passes.”

How the foregoing, which are clearly urgent matters all, are to be addressed by a competition law is something that needs further examination.

Competition Law? Maybe.

At this point, perhaps it’s best to state some caveats: do we need a competition law? Yes. But we need one that will work effectively for the interests of Filipinos. And the measure of its importance tells us that we better not be too eager in passing such legislation.

And indeed, when we say that we want to foster better competition then we better address the question: competition for whom? And competition where?

So, on a substantive level, and inasmuch as he pulled me to the punch in saying it, then I might as well borrow the words of Teddy Boy Locsin (in his 04 September 2014 “Teditorial”): “If the anti-competition law seeks to stop giant local companies from keeping local competition down and foreign competition out, then that law is a yes. But if seeks to break up local giants now dominating the local market and getting a lion’s share of a cash rich country after beating the foreigners who were taking all the money long ago, then it is a big, fat no.”

If we say better competition to benefit our consumers, then we have to remember that our consumers need money to consume. Which they can’t do if they’re unemployed or underemployed. Which means that they need companies, preferably Filipino companies, succeeding and succeeding well not only in the Philippines but also in an ASEAN integration and beyond.

Ultimately, size is relative and what may seem like giants in our neighborhood that is the Philippines may actually be puny when placed in regional and global arenas.

Consequently, the size of our market should lead us to appreciate the idea of “natural monopolies,” whereby maximum efficiency is derived by way of economies of scale through one or two suppliers.

As such, Filipinos should be supportive of even larger Filipino conglomerates. Take any as example and one would see that despite their size and reach, could not really be considered possessing monopoly power due to the nature and threat presented by global (or regional) competition.

Again, Teddy Boy Locsin gets it remarkably right: “Big is better if it is Filipino because capital has a nationality” but “big is bad if it is foreign, which will destroy what we have, milk it by big bonuses, siphon profits abroad, and make sure no Filipino ever gets big again. If foreign competition wants to break up Filipino giants, let the free market do it. Do not make a Filipino law tailor-made for foreigners do the job for them. Foreign competition does not believe in Filipino competition in their home countries. It only believes in foreign competition here and elsewhere abroad.”

That is why questions on the need to regulate mergers through a competition law at this point are with merit. Not all countries with competition laws even have provisions on merger regulation. As Lisa Campbell, Senior Deputy Commissioner, of the Canadian Competition Bureau, remarked: “the size of a business, even one that dominates a particular market, is not in an of itself, a cause for concern. Businesses may need to become large to achieve lower production costs or to compete against foreign and domestic competitors.” (International Antitrust Forum Fifth Annual Chicago Forum on International Antitrust Issues, June 12-13, 2014)

Further on the substantive, we know that a government-managed competition will not result in free competition. We know that doing so results in inefficiency. Instead, at this point, the best competition policy that we could advance would simply be to strictly enforce the rule of law. The many many laws that we already have now.

Instead, if we must have a competition law by next year, then let it include provisions on the possibility of foreign corporations sneaking up in acquiring Filipino companies or influence to the point that monopoly powers are exercised from beyond Philippine jurisdiction, constricting Filipino entrepreneurial efforts, and damaging local consumer interests. And let us explore more vigorously the idea of implementing the “effects” doctrine as a manner of acquiring jurisdiction over those who seek to damage Philippine economic interests from abroad.

One last point on the substantive: if we must have a competition law then why are the competition law drafts essentially similar in text to foreign competition laws? To have influences is understandable but that is not the point. US laws are worded generally, for example, but that is so because the core provisions were made a century ago. But that was followed by more than a hundred years of US jurisprudence (plus that of Europe and Japan) that we should have learned from and could have been inputted into the draft competition law, thus giving the same more depth and precision.

At the institutional level, I invite everyone to peruse BizNewsAsia’s 01 December 2014 issue. There it reiterates a fact that every economist and policymaker knows: the Philippines has “24 million families and 100 million people.” And yet, political and economic power has been held only by a select few. With that, “since 1962, the country has deteriorated, from Asia’s richest to being the region’s economic laggard.”

I mention that because indeed, another area we need to look at is the connection that competition policy has with corruption, and thus, relatedly, the need to constrain the ill-effects of having both political and economic power held by a select number of families in the country, which is something that even the latest drafts of our competition laws seem to ignore.

Because, what is the point of having trade commissions, legal procedures, and the like if in the end the judged and the judge are from the same side of the fence? Competition laws work in the US and Europe as the people who lead in business would not be the same people who comprise government, thus serving as a check upon each other. While undoubtedly relationships exists between the two groups in any country, that is a far cry from having the same families actually in control of both business and government.

In conclusion --

I should wrap up here before I exceed your patience (if I had not done so already!).

Competition policy and law are definitely important. But they are not panaceas. And like everything else, they would need a certain context to have any positive effect.

In this regard, we must consider that competition-wise we are not as ramshackle as others would have us believe. The Global Competitiveness Index gave us good marks for “intensity of local competition” (61), “prevalence of trade barriers” (51), and “prevalence of foreign ownership” (51). And studies (such as Ajit Singh’s) suggest that policymakers should consider “optimal” degrees of competition rather than maximum competition as apt for a developing country economy (such as the Philippines’).

Contrast this with the scantiness of our resources and experience, administratively and judicially, that are necessary to implement a competition law. Couple this with the abundant reliance on outside analysis that may not have thoroughly considered the peculiarities of the Philippines.

On this point I agree there is a huge need to develop competition advocacy: the thorough education of both Bench and Bar, and the eventual creation of experienced and trained competition and consumer champions.

From years of policymaking we know that if there’s a thing that the ruling sector wants immediately accomplished, with zero fuss, then generally it’s best to make a fuss about it. It is precisely at such moments that time for further study becomes a necessity.

In relation to crafting our competition law, the same thought should apply considering the profound effect it will have on the country’s economy and Filipino lives.

Thank you. I think shall stop here.

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ASEAN Competition Law and Policy: Toward Trade Liberalization and Regional Market Integration (Pornchai Wisuttisak & Nguyen Ba Binh; ICIRD 2012)

Drafting Competition Law for Developing Jurisdictions: Learning from Experience (Eleanor M. Fox
 and Michal S. Gal; 2014)

The Divorce Revolution Perpetually Reduces U.S. Economic Growth: Divorce Removes a Fourth of Head-of-Household Productivity Growth (Henry Potrykus and Patrick Fagan; 2012)

Competition and Competition Policy in Emerging Markets: International and Developmental Dimensions (Ajit Singh; G-24 Discussion Paper No.18, 2002)

2014 Economic Freedom Index (Heritage Foundation)

2014-2015 Global Competitiveness Index (World Economic Forum)

2014-2015 Times Higher Education World University Rankings

2013 Global Manufacturing Competitiveness Index (Deloitte Touche Tohmatsu Limited and the U.S. Council on Competitiveness)

2010 ASEAN Regional Guidelines on Competition Policy