Healthy competition is the ‘Magna Carta’ of the free market
Monday, 13 January 2014 00:00
We are all schooled by the thinking of Adam Smith: as consumers, we treasure the freedom to choose. The more choices we have the better. More choices mean more sellers and manufacturers are competing for our attention. Our attention can be captured in many ways, but usually in three particular ways: low prices, quality services and innovative products. In the market jungle, manufacturers and sellers must ruthlessly compete against each other in order to survive. They must compete for our attention. This process of competition, unwittingly but importantly, procures the things that consumers want and need. Without competition, the foundations of market economy will collapse and consumers and entrepreneurs will find themselves beneath that pile of rubble. It is therefore no exaggeration to say that competition is the ‘Magna Carta’ of the free market.
After all governments are for the people
Most governments across the world in the 21st century have chosen to work in the open market where free competition is respected, but the importance is that governments should be alert to potential abuses of the free market as it is not a full proof system. Therefore it also should be prepared with some mechanism, plan, or strategy to curtail the development of undesirable market conditions and, where necessary end those anticompetitive activities that develop to kill a market. This contingent approach might involve a scaled-down effort to enforce antitrust or competition laws or the use of some type of regulatory agency to police anticompetitive practices or to take more extensive, proactive measures.
There are several reasons why regulation can and should be part of the free market to establish competition, particularly during a period when the global market is moving towards a more competitive structure for trade where negotiations can happen between parties or countries who are not equal in the bargaining power and may lead to unjustified mechanisms to exploit an individual, a country or a region to destroy its comparative advantage. Therefore especially in developing and vulnerable economies governments must ensure the following to strike a balance in the free market activity:
Existing monopolies must be monitored
The Government will need to prevent the monopolist from abusing its power and, perhaps, to force the monopolist to co-operate with new entrants on reasonable terms and conditions. Otherwise the free market will collapse at some point as the benefits of the market economy will not be available to the weaker parties and new entrants to the market.
Market forces unchecked are not likely to achieve free market objectives
Industrial, social or fiscal policies may demand conditions or actions that cannot be achieved in a purely competitive, unregulated market. The governments may want to accelerate the development of certain sectors or services, to assist industries and exports. For all of these reasons, the Government is likely to need the capacity to exert some influence over market participants. Governments may want to negotiate with competitors, in some cases, to develop the terms of a deal that accomplishes the governments’ policies. In other cases, the governments may need to establish certain minimum conditions to be satisfied by all users.
The challenge to governments is to seek these policies without imposing rules that intervene in the price or the number of components that consists of a service or a product which will impede the operation of market forces. For example, if the government imposes excessively onerous price caps, or interconnection terms or if it requires excessively high service standards, these conditions may prevent competition from emerging and can distort the operation of market forces to the point where inefficiency results and progress is delayed.
Someone must be available to resolve disputes and redress wrong doings
A regulator may be little more than a mediator or an arbitrator of disputes among competitors. For example, the government may require interconnection among competitors on negotiated terms and conditions. It may resolve disputes where no interconnection agreement can be reached. The government also may be available to address widely recognised unfair practices, including such familiar anticompetitive actions as unfair and deceptive pricing, price fixing, price gouging, and collaborative action among competitors.
If the corrective regulations are not in place new technology will not develop
Price fixing and deceptive methods which could be adopted by inefficient or unscrupulous players of the supply chain in a free market can deprive the competitiveness of an economy. If corrective actions are not taken by the governments through a transparent mechanism for such practices, the larger interest of a nation can be at risk. Creating an enabling environment for a nation to compete on the global platform falls as a responsibility of a government.
If market manipulations are ignored for short term gains by a few, new innovations, technology creation and transfer or product diversification will not take place easily. This could result in the downfall of key economic sectors which would be the pillars of nation building.
Smaller economies and developing economies has to keep the eyes open
There are many vulnerable, emerging and developing small economies around world that has accepted the concept of free market and free trade as an economic model. Whilst the developed countries have over the years experienced the pitfalls of the market economy, they have set up strong institutional frame work to protect the interest of the consumer and the manufacturer through regulatory legal framework.
Creating anti-competitive laws to combat the methods used by market manipulators to distort the free market ideology becomes an important tool for governments in the developing world to adapt faster. Asian countries which are considered as the leading manufacturers of the world need these market reforms if they are to compete effectively in the next few decades. Therefore creating a healthy environment for free trade is by far and largely falls on government as a responsibility. It is also the duty of associations and chambers involved in international business to guide the governments to best and most ethical practices in the interest of a nation.
Sri Lanka reforms in international transportation
The recent policy reform in Sri Lanka on the anticompetitive and monopolistic activates in the international transportation industry is a good example of correct policy, where government and its lead policy makers have clearly identified a problem and fixed it without interfering in the pricing or number of components of the deceptive practice.
The solution was based on pragmatic and practical understanding of the international transportation system that has evolved through a period, which has brought upon changes in real liability and responsibility among stake holders in the supply chain, where a small section of the service providers were using loopholes and threats to monopolize the market.
The Sri Lanka model on establishing market competition in international transportation is an example for the developing world, particularly in Asia, Africa and Latin America where such policy vacuum has been in existence for many decades.
Research internet sources and abstracts from New Zealand Competition Commission
(The writer is the CEO of the Shippers’ Academy Colombo, member of the Global Shippers’ Forum and immediate past Secretary General of the Asian Shippers’ Council. He is a graduate in economics from Connecticut State University USA)