Business, Markets and Government in the Asia-Pacific

Competition Policy, Convergence and Pluralism

Yun-Peng Chu, Rong-I Wu

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134739233
• Edition: 1
• Topic: Social Sciences
• Subtopic: Ethnic Studies
• Index: Social Sciences

Exploring the thorny issues of industrial organisation, competition policy and liberalization in the Asia-Pacific region, this book examines the ways in which governments regulate business. Using case studies from China, the USA, New Zealand, Thailand, Malaysia and Japan, the authors take a comparative look at the evolution of policies and their implementation on the ground.
With a specific focus on the energy, transport and telecommuncations sectors, this book represents the most up-to-date analysis of the ways in which governments in the Asia-Pacific are coping with rapid industrial and economic change.

1 Introduction

Rong-I Wu and Yun-Peng Chu

The interrelationship between business, markets and government is academically intriguing and practically important, particularly in the Asia Pacific region, where a whole spectrum of different economic systems at different stages of development is in evidence. As the fastest growing region in the world, the Asia Pacific is also a natural laboratory to test the many different hypotheses posed by both economists and policy-makers.

One such hypothesis is that of ‘convergence’. For the governance structure in business and markets, this means convergence to a uniform mode of business operation in a uniform type of market. For competition policy, it denotes harmonisation of competition policies across countries. For regulatory reform, it means convergence to a particular mode of government deregulation of the markets and privatisation of state enterprises.

A competing and diametrically opposed hypothesis is that of ‘pluralism’. For the governance structure, this means the coexistence of different patterns for different economies, or even for different markets and sectors in the same economy. For competition policy, this means that different economies should choose a competition policy that is best for them; in some cases, it could mean the absence of policy. For regulatory reform, this means the coexistence of different patterns or paths taken by the authorities, and perhaps desirably, or in some cases inevitably, so.

One hypothesis that lies somewhere between the above two extremes is that of ‘gradualism’, which takes the view that institutional changes in the Asia Pacific region are evolutionary. Certainly, it is obvious that different economies start from different points on the spectrum of economic systems, and at different stages of development. Pluralistic development is only to be expected given these different initial conditions as well as the different forces at work. Convergence is not precluded, nor is stable pluralism — in some cases, the former can be viewed as a useful concept in analysing evolutionary changes; in other cases, it is the latter that has more explanatory power. What is more interesting is not convergence or stable pluralism in itself but how and why institutional reforms occur in different economies.

The chapters presented in this volume do not settle the issue once and for all. It is doubtful if the issue can ever be settled. But they do shed important light on the matter.

BUSINESS AND MARKETS

On the governance structure in business, Wendy Dobson (Chapter 2) examines East Asian relationship-based business networks, discusses possible explanatory factors, and suggests how and why the organisational characteristics of these networks might change in the future. The chapter first points out that East Asian business systems do not figure prominently in the literature on economic organisation, and therefore adopts the conceptual framework used in the emerging theory of dynamic firm capabilities, in which the firm is the unit of analysis.

Dobson surveys the main business systems in Asia — Japanese keiretsu, Korean chaebol, the Chinese family firm and the Southeast Asian conglomerates — exploring their diversity of organisation, production and trade, as well as examining possible explanatory factors for this diversity. Japanese keiretsu are characterised by implicit cooperative relationships, both horizontal and vertical, among otherwise independent stand-alone firms. Korean chaebol, accounting for an estimated 70 per cent of the Korean economy by sales/GNP, are centrally-controlled, vertically-integrated clan-controlled business groups which have been given preferential credit treatment by the Korean government. The Chinese family firm is found in most Asian economies and is characterised by smaller size, flexibility, opportunism, paternalistic leadership, high levels of internal operating efficiency and low levels of organisational complexity. The Southeast Asian conglomerate, on the other hand, encompasses ethnic Chinese and indigenous capitalists operating numerous family-owned conglomerates of varying sizes.

Based on different comparative measures — industrial characteristics, the role of the state, norms, enforcement mechanisms and legal systems — it is found that these major business systems vary widely in their characteristics and forms of organisation. Dobson discusses how Asian business systems have changed recently, concluding that for the future the introduction of market-oriented policies appears to be bringing about organisational learning from competitors, including, but not limited to, duplicating the characteristics of Western firms. That such learning is not limited to duplication will likely be partially due to institutional inertia, which would tend to favour established practices and relationships. Opposing such inertia, as East Asian governments adopt increasingly open market policies, is international pressure to adopt international rules and procedures with regard to market access to foreign producers and capital.

Dobson presents data from business surveys conducted in Thailand, Malaysia and Taiwan on international networks in Asia and examines the question of convergence between Western and Asian firms as they internationalise. There is evidence supporting the theory that when firms locate production abroad, patterns of exchange may converge, in part because of the impact of locational determinants, such as host government policies. This conclusion is reached through comparison, by nationality of the firm, of the production and sales activities of firms located in different Asian countries.

In concluding, Dobson suggests that the question of ‘convergence’ is overstated and that in fact optimal industrial organisation may differ both for a single country during different stages of development and across countries at a specific point in time. For the Asia Pacific Economic Cooperation (APEC) process and the World Trade Organisation (WTO), the implications of the analysis are mixed. A suggested approach would be for APEC and the WTO to mediate these pressures by creating working groups mandated to develop greater understanding of national market structures and competition policies.

Although Dobson finds some evidence in support of convergence for international investment, she is very conscious of the fact that optimal industrial organisation may be stage-of-development specific or country-specific. More studies are needed.

In contrast, Peter A. Petri’s chapter (Chapter 3) seems eager to endorse a particular mode of business operation which he describes as performing very well in the 1990s — that is, the US model of flexible factor markets and institutions. But he warns that what has been true for the 1990s is no guarantee for the success of the model in the future when external factors change.

His study of markets, ‘competition and restructuring in the 1990s’ aims ‘to understand how a country’s competitive systems affect its ability to adjust and transform’. Arguing that different competitive systems vary in their abilities to handle different kinds of shocks, Petri posits that the US economy’s out-performance of the Japanese economy and major European economies in the 1990s can be attributed to the fact that the challenges of this decade have played to the strengths of the American system more than to others.

To better understand these strengths and weaknesses, Petri compares various indicators of institutional adjustment and market flexibility across the economies of France, Germany, Japan, the United Kingdom and the United States. He concludes that the United States indeed surpasses these other four economies in the characteristics required to best deal with the shocks of the 1990s: factor markets and institutional flexibility. However, though the US system has fared well in this decade, Petri warns that the types of shocks which might occur in the next decade could very well play to the strengths of other systems.

Petri argues that an underlying distinction to be made between various competitive systems is between unilateral and joint decision-making approaches. The unilateral, or ‘cowboy’ approach is less likely to take into account the implications of individual actor decisions on the rents of other agents. On the other hand, the joint decision-making, or ‘family’, approach requires weighing of the objectives of many indicators, even if choices are ultimately made by a single indicator. All competitive systems are argued to involve some weighted combination of these two poles.

The argument is that the economic environment of the 1990s required mechanisms which allowed existing factor combinations to be dissolved quickly and new ones to be formed. A system with maximum factor market and institutional flexibility performed best under these circumstances. The 1990s was a period of rapid technological change and globalisation of production. Important trends included: changes in information and communication technology, coupled with deregulation; shifts towards ‘open standards’ in these sectors, permitting small firms to benefit from network economies; increased flows of capital and expertise across firms; and the emergence of low-cost producers of high technology.

Petri compares the sample economies in terms of overall economic performance, as well as a number of indicators of structural flexibility and adjustment. These indicators include real GDP growth, unemployment, output per worker and stockmarket capitalisation from the International Monetary Fund (1996) and the International Finance Corporation (1996), as well as indicators of labour and capital mobility and economic incentives from the World Economic Forum (1994). To help filter out differences due to levels of development and make it possible to use more detailed information, the sample of countries does not include all the Asia Pacific region.

The United States is found to have the highest values for indicators of capital and labour mobility, as well as the highest overall levels of economic incentives and capital market activity in the mid-1990s. Anecdotal evidence suggest that US capacities for restructuring, mergers and venture capital make it more flexible in terms of institutional innovation. Petri warns, however, that the US adjustments in the early 1990s involving massive lay-offs in the labour market pushed the limits of political acceptability. Moreover, given that each system has its strengths and weaknesses, it would be surprising if the performance rankings of different competitive systems did not again change in the future.

Justin Yifu Lin’s chapter (Chapter 4) turns attention to a very different type of economy: one which is undergoing institutional change on a gigantic scale — that of the People’s Republic of China.

Lin notes the achievements of the Chinese economy since implementing reforms in 1979: the average annual growth rate for GDP was 9.8 per cent in the period 1979–95; and the average growth rate of real per capita consumption increased from 2.2 per cent in the period 1952–78 to 7.4 per cent in the period 1978–94. Despite these achievements, the reform period has been troubled by recurrence of ‘boom-and-bust’ cycles, which threaten the stability and sustainability of China’s economic growth.

Economists and policy-makers in China are realising that a fundamental cause of these cycles has been continued distortions in the macro-policy environment, and in particular the suppression of interest rates. Marketing reform has been delayed because of the inefficiency of most state-owned enterprises (SOEs), as market-level interest rates and credit discipline would face massive adjustment in that sector. SOEs still form the backbone of the Chinese economy and unless the efficiency of these enterprises can be improved, financial sector reforms cannot be completed.

Lin notes that in research and policy debate in China in the early 1980s, researchers attributed the problems of inefficiency of SOEs to their lack of autonomy and incentives. More recently, many economists have argued that the vagueness of property rights is the major cause of the SOEs’ problems. So far, SOE reforms have covered both of these aspects, and, as expected, they have resulted in an improvement in productivity. According to World Bank (1992) estimates, the average annual growth rate of total factor productivity in the state sector was 2.4 per cent per year from 1980 to 1988. However, despite this, total losses from SOEs increased to RMB 45.3 billion, about 14 times the 1985 figure.

Lin argues that the current problems of SOEs originate from the separation of ownership and control, combined with various policy burdens imposed by the state. Because of separation of ownership and control, problems of incentive incompatibility, information asymmetry, and the disproportionate distribution of liability between the owners, the state and management arise. Problematic policy burdens include: over-capitalisation, and the unwillingness of the state to allow such enterprises to go out of business, despite their highly inefficient capital/labour ratio; the serious price distortion for the products of some SOEs; and the huge burden of retirement pensions and other welfare costs that many SOEs have to bear.

According to Lin, SOE reform involves two primary tasks. One is to create a market environment in which enterprises with all types of ownership arrangements can compete in a fair environment in which ‘the fittest survives’. Such a market environment would supply a low-cost and efficient mechanism — the profits of an enterprise in comparison to the market average — to monitor enterprise performance, thereby reducing informational asymmetries. The other task is to conduct incremental ‘Pareto-improving’ steps to mitigate the effects of, or remove completely, state policy burdens on SOEs.

One such step would be for extremely capital-intensive SOEs to make explicit state subsidies, and to fix them at current levels, while allowing a shift in their production to more competitive products. Another would be to liberalise prices in the case of industries producing such tradeable products as coal and petroleum, and, in the case of SOEs in the large communication and transportation sectors, to eliminate shortages by applying the cost mark-up pricing method to their products and services. A third step would be for the state to relieve all SOEs of the burden of pensions and other welfare provisions for aged and retired workers. This would allow SOEs to compete on a level playing field with non-SOEs, which do not have such a burden.

It seems that although the reforms recommended are generally consistent with the idea of competition enhancement, the specific remedies suggested obviously have a strong ‘local’ flavour: they are based on the specific conditions confronting China’s SOEs.

While there is clearly need for further study, the Chinese experience suggests that ‘evolutionary’ and ‘gradual’ change in the structure of governance in business organisation delivers results. Even though Chinese reforms have moved at ‘breathtaking’speed, they have been evolutionary in nature compared with most of the Eastern European reforms.

COMPETITION POLICY

In the area of competition policy, convergence versus pluralism versus gradualism is also a critical question. Some see the trend towards bilateral or multilateral harmonisation of competition policy as a desirable and inevitable one. Others emphasise that different types of business systems in different economies at different stages of development may need different competition policies. Others recognise the need to enhance international cooperation while respecting pluralistic development in different economies.

Michael Trebilcock (Chapter 5) provides a foundation for the international negotiation of competition policy issues, in reviewing the evolution of policy in the United States, Canada and Europe.

Trebilcock identifies a number of procedural and institutional issues in the design and administration of domestic competition law regimes, and examines some international dimensions of domestic competition laws in light of increasing pressures to harmonise elements of these laws.

Beginning with a brief discussion of standard economic arguments for and against the benefits of monopolies, Trebilcock goes on to discuss the history of competition laws. As is evident from his comparison, the United States, Canada and the European Union differ in many respects with regard to competition policy and its enforcement. Trebilcock also highlights the major issues currently being discussed under six areas: courts versus commissions, the functions of specialised tribunals, the composition of tribunals and their procedures, the scope of judicial review of tribunal decisions, private enforcement, and per se rules versus rules of reason.

In the last section, Trebilcock clearly identifies the difficulties involved with the international dimensions of competition law. Although it is true that harmonising systems across national boundaries will have an efficiency-inducing effect, Trebilcock breaks with views that advocate a long-term goal of a deeply economically integrated international system with highly standardised rules of competition. Trebilcock agrees that harmonisation of domestic laws across countries will very likely serve to reduce administrative costs to firms operating across national boundaries, facilitate the free movement of capital, and potentially enable economies of scale in production and distribution. However, he argues that interest in the European Union model as a general paradigm is misguided, since such a model arises out of a particular set of geopolitical circumstances. Given the difficulty involved with reaching consensus on the form of a single, more harmonised system of competition laws in such trilateral contexts as the North American Free Trade Agreement (NAFTA), prospects for doing so in a multilateral context such as GATT/WTO seem remote.

Consequently, Trebilcock argues that an important distinction to be made in looking at the issue of harmonisation is positive and negative integration. Positive integration outlines which policies countries must adopt, while negative integration maps out what policies countries may not adopt. Given the wide range of differing institutional structures and conditions across countries, a more modest agenda of adopting negative integration as a guiding principle for harmonisation would appear to be more realistic. Such international treaties as...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• LIST OF ILLUSTRATIONS
• 1: INTRODUCTION
• 2: BUSINESS NETWORKS IN EAST ASIA DIVERSITY AND EVOLUTION
• 3: MARKETS, COMPETITION AND RESTRUCTURING IN THE 1990s
• 4: STATE INTERVENTION, OWNERSHIP AND STATE ENTERPRISE REFORM IN CHINA
• 5: THE EVOLUTION OF COMPETITION POLICY LESSONS FROM COMPARATIVE EXPERIENCE
• 6: THE CONVERGENCE OF COMPETITION LAW WITHIN APEC AND THE CER AGREEMENT
• 7: COMPETITION POLICY IN APEC PRINCIPLES OF HARMONISATION
• 8: TRADE AND COMPETITION POLICY
• 9: COMPETITION REGULATION AND POLICY IN THAILAND
• 10: POLICY APPROACHES TO ECONOMIC DEREGULATION AND REGULATORY REFORM
• 11: TELECOMMUNICATIONS AND PRIVATISATION IN ASIA
• 12: JAPAN’S AIR TRANSPORT POLICY AT A CROSSROAD
• 13: POWER SECTOR REFORM IN MALAYSIA PRIVATISATION AND REGULATION
• 14: LIBERALISATION AND PRIVATISATION OF THE THAI POWER SECTOR ISSUES AND PERSPECTIVES
• 15: SUMMARY OF DISCUSSION