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Big business, politics and competition

Date
Time (GMT +00) 13:00 14:30
Hero image description: Skyscrapers and tents Image credit:k r ranjith Image license:Creative Commons

Speakers:

Karen Ellis  - Programme Leader, ODI

Ibrahim Saif - Centre for Strategic Studies, University of Jordan and Carnegie Middle East Centre

Phil Evans - Director, Fipra International Limited

George Lipimile – UNCTAD

Chair:

Susan Joekes – IDRC

The discussion was opened by Karen Ellis with a presentation on “Big Business, Politics and Competition”. The presentation was based on current ODI research on the costs and benefits of competition in developing countries, and aims to paint a picture of the relationship between Big Business and Government. The value of competition is understood well in developed countries – it plays a fundamental role in determining the allocation of resources in the economy.  In developing countries this usually means a transfer of resources from poor to rich people.

Competition helps discipline big business as it stops anti competitive practices and stops companies from accruing excess profits, it also allows new players to enter markets and challenges the dominance of the elite; businesses which have a close relationship with government.

The project looked at the sugar, beer, cement and mobile phone markets. These markets are generally dominated by big business.

Big business often has a close relationship with government - they are sometimes owned by the government or by individual politicians, or they may have corrupt business dealings. The government may be highly interventionist with regard to certain big businesses through either formal measures to set prices, or through requesting selective discounts to certain customers, or with specific objectives in mind such as keeping employment rates high.

Big businesses stand to gain from relationships with government, as the government can protect them from competition. These relations can lead to a mutually beneficial collusion with the government, making these big businesses the “elite”. This relationship allows new players to be excluded very effectively and can damage growth more broadly whilst not allowing the implementation of competition policies.

This situation is very difficult to tackle, however many people stand to gain from competition reforms. Consumer groups, industrial users who need lower prices for products to become more competitive (such as confectionary producers that would benefit from lower sugar prices), new entrants to the market, the media as well competition authorities should all be mobilised in order to implement competition reforms.

Ibrahim Saif looked at competition projects in Jordan, Egypt, Morocco and Tunisia and found that in most cases a handful of producers controlled around 70 – 80% of the market.

Both Jordan and Egypt in the early 90s had very high levels of public debt, and embarked on a series of institutionally sponsored (by the IMF) privatisation reforms in order to create an environment more conducive to business.

There is however a lack of governance in these countries and there is weak capacity to enforce competition laws leading to the question of whether the reforms were really meant to reform the market structure as markets are still dominated by two or three big businesses. Competition policy needs to break these monopolies and alter the market structure in order to allow new players into the market. It is clear that there is an abuse of market power, however governments only make informal reprimands to the abusing companies without imposing real sanctions. Punitive laws for anti-competitive practices are often watered down by governments due to special relationships with big business.

Phil Evans continued the discussion by pointing out that there was a degree of similarity between countries in regard to anti competitive practices. The “Disney Law” in the USA allowed copyright to be extended to 95 years in order for the Mickey Mouse copyright not to fall into the public domain. In the UK all supermarkets raised the price of milk in order to give a better deal to farmers, however this was found to be a form of collusion and supermarkets were forced to remove these price rises.

In the EU and the USA there is the ability to act after political pressures have been applied; there are mechanisms in Europe that allow countries to deal with competition conflicts.  This may not be the case in developing countries.

There is great difficulty in getting things moving, in terms of competition policy, in developing countries as well as difficulty in stopping governments from doing the wrong thing. Policies designed to protect industry in the current economic climate can turn into a “beggar thy neighbour” policy – State Aid Laws can stop this, however only the EU has these kind of laws.  Developing countries cannot afford to do this.

George Lipimile stated that developing countries are not against big businesses since countries that attract big businesses all show good growth rates. There is however a worry in developing countries about the behaviour of big businesses since there are no instruments to effectively regulate their behaviour.  Competition laws tend to be quite weak and many big strategic businesses tend to be exempt from competition laws.

Governments were told, during the last two decades, that they should not get involved with businesses and that privatisation was the main goal. Public monopolies were however turned into private monopolies, however profits had not been the main driver for state owned enterprises and many workers were made redundant and others lost benefits which SOEs previously provided them.

The involvement of politicians in big businesses is now becoming more prominent in developing countries. For competition laws to work well, corruption laws, consumer standard laws, consumer associations and an active press are also needed as watchdogs against bad practices and abuse engaged in by big businesses.

The discussion was then opened to the floor where a number of issues were raised.

The issue of the links between political competition and economic competition was brought up by a member of the audience. George Lipimile stated that in Mauritius the competition chief is appointed by both the prime minister and the leader of the opposition - it is however easier to do this in democratic countries than in non democratic countries. Ibrahim Saif stated that big businesses can manipulate not just laws but also constitutions as was the case in Egypt which went from a socialist leaning state to a market economy state.

Social responsibility by big business was also discussed. GeorgeLipimile stated that there needs to be advocacy for multinationals to behave in developing countries as they would behave in their home countries. Governments should stop supporting their MNCs from their own countries which behave in an anti-competitive and unethical manner. Regional competition authorities are needed in order to stop companies from just moving production to neighbouring countries if they are forced to halt anti-competitive and unethical practices.

Karen Ellis also replied that CSR could potentially be a way to get companies to be more responsible, but CSR departments are generally quite weak in MNCs compared with the profit motive.

Sustainability was also discussed. Phil Evans noted that a number of sustainability schemes aimed at one goal usually ended up producing different results and that restricting players in the market in the name of sustainability may not help with the greater good. George Lipimile argued that there should be a method to expose bad practices of MNCs in developing countries since most can do whatever they like due to their strong connections with politicians.

Karen Ellis concluded the discussion stating that business can be a strong positive force for development, but needs to be properly governed. We need to find ways to involve business in resolving big global problems such as climate change.

Description

What role does Big Business play in developing countries?  Does competition discipline business? How does Government engage with Big Business? 

Emerging findings show that Government plays an important role in determining the amount of competition that exists between businesses in a market, while the degree of competition itself affects the balance of power between Big Business and Government.

These issues were explored at a lunchtime public meeting at ODI on Tuesday 27th January 2008.  The meeting was organised jointly with the International Development Research Centre (IDRC) based in Canada, and presented the emerging results of cutting edge research looking at the effects of big business and competition in developing countries.  The role of government in supporting business through the current economic crisis was also considered, with a look at the evolving UK policy response to the crisis.

ODI is organising a series of public meetings throughout 2009 on ‘Harnessing the power of business for development impact’, in conjunction with DFID and Business Action for Africa.  For further details please see:

http://businessfightspoverty.ning.com/group/businessfordevelopment