Competition in Asia: too little of a good thing

Weak competition is worrying Western economies. It has been linked to inadequate investment, mounting mark-ups, increasing inequality, weak wages, struggling start-ups, pricey products and insufficient innovation. Asian economies could learn from their mistakes. Many of them will face, or are already facing, similar challenges. Working together through a multilateral approach to these challenges will make them easier to address. Addressing these challenges early will pay dividends into the future.

Advanced economies are ticking-off many of the symptoms of weak competition. While market concentration, mark-ups, mergers and profits are often increasing, business formation, investment, wages and productivity growth are often declining. Economists, including Jason Furman, Larry Summers, Paul Krugman, Andrew Leigh and Joseph Stiglitz, point to weak competition as a key culprit.

The story in Asia is mixed. The World Economic Forum’s (WEF) 2018 Global Competitiveness Report measures countries ‘extent of market dominance’. Of course, having concentrated markets does not necessarily mean a lack of competition. But for Asia, market concentration tends to go hand-in-hand with deeper competition problems.

Japan is the regional leader. It ranks best in Asia and second-best in the world after Switzerland for the diversity of its markets. The powerful 70-year-old Japan Fair Trade Commission oversees the Anti-monopoly Act, set up by the post-war Allied administration to combat the infamous dominance of the zaibatsu super-conglomerate firms. It gave Japan a strong and early start to managing competition. The commission has been active ever since with over 800 staff, including 438 investigators.

Mongolia, on the other hand, is the regional laggard. The WEF ranks Mongolia as 137th out of 140. Issues include weak enforcement due to poor regulatory capacities, the dominance of state-owned enterprises, rampant corruption and cronyism, a lack of government transparency and accountability, state interference in the private market and low rates of foreign investment stifling new business formation. Formal competition laws are in place but rarely enforced. The prospects of meaningful change soon appears slim.

The Philippines similarly ranks poorly at 112th. The country’s Competition Act barely passed in 2015 after languishing in Congress for 24 years. Manila’s power and water utilities are among the costliest in Asia, more expensive than in Seoul and Singapore. Powerful conglomerates like Ayala Corporation dominate real estate, banking, telecommunications, water, education, energy, electronics, healthcare, manufacturing and business management.

The Philippines’ 10 biggest firms had revenues equivalent to 11 per cent of GDP, double that in Australia. Unusually high profit margins and cartel behaviour, including price fixing and collusion, appear rife and investment is suffering as a result.

South Korea has an infamous competition problem due to its chaebol conglomerates. South Korea ranked 93rd in the WEF’s study. The chaebol make up only 0.3 per cent of profit-making firms in South Korea but dominate the economy. The 10 largest chaebol accounted for more than 40 per cent of South Korea’s GDP in 2017. The five largest represent about half of the stock market’s value.

Despite taking the lion’s share of GDP, chaebols only employ 20.4 per cent of the labour force working in profit-making industries. Many chaebol executives have entered parliament, highlighting how market dominance can become entrenched through political dominance.

Corruption is a major issue that saw former South Korean president, Park Geun-hye, jailed for 24 years. Idle assets and deferred investments are rife and activist funds are manoeuvring to shift the hoards of stagnant capital on the super-firms’ balance sheets.

In sum, Asia has a competition problem. The problem is that there is not enough of it. Whether it is uncompetitive state-owned enterprises in China and Indonesia, dominant conglomerates in South Korea and the Philippines or lax laws in Mongolia, competition is a common challenge.

These are not just domestic challenges, either. The integration of Asian supply chains and the continued rise of multinational firms mean that multilateral cooperation is more important than ever. Research shows that multilateral cooperation can also help policymakers to implement difficult reforms domestically.

Given the clear case for cooperation, it is strange that there is no global body devoted to competition. The OECD only occasionally considers the issue for advanced economies while the development banks only occasionally consider the issue for emerging economies. Regulators from many countries meet informally through the International Competition Network, but the forum has no political buy-in or focus on reform.

Asian economies should lead the charge through APEC and the G20 to create a new international body devoted to competition law and policy. As a forum for regulators, ministers and officials, it could provide advice to countries on how to implement difficult competition reforms and share best practices and policy experiences.

It would allow regulators to develop a consistent approach to the challenges posed by multinational firms, rather than the current patchwork of inconsistent regulations. It would help policymakers sell difficult reforms domestically by pointing to a global consensus.

It would give policymakers new ideas, create pressure for implementing reforms and could be used to leverage domestic legislatures. The forum need not be binding and could be housed within an existing institution with a global membership, such as the World Bank.

Weak competition has a nasty habit of becoming entrenched over time as vested interests tighten their grips and economic power transforms into political power. Getting on top of Asia’s competition challenges early will pay dividends for years to come.

This article was written by Adam Triggs, the Director of Research at the Asian Bureau of Economic Research in the Crawford School of Public Policy at the Australian National University and Jake Read, a research student at the same institution.  It was published by the East Asia Forum.