Competition and Corruption - David Lewis - 2014 OECD Global Forum on Competition
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This presentation by David Lewis was made at the first session of the 2014 Global Forum on Competition (27-28 February) which focused on fighting corruption and promoting competition. Find out more at http://www.oecd.org/competition/globalforum
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Competition and Corruption - David Lewis - 2014 OECD Global Forum on Competition
- 1. Fighting Corruption and Promoting Competition Background paper by David Lewis, Executive Director, Corruption Watch, South Africa 27 February 2014 Global Forum on Competition
- 2. Outline • Introduction • Combating corrupt and anticompetitive conduct - addressing ‘wicked’ problems • Economic rent and rent seeking behaviour • Correlation between competition and corruption • Different forms of corruption • Key areas for roundtable discussion
- 3. Addressing ‘wicked’ problems • ‘Wicked’ in that they are resistant to resolution rather than evil Characteristics of a wicked problem: – – – – – – – • But closely related – – – – – – • No definitive formulation Unstable Many interdependencies and often multi-causal No clear solution, but solving involves changing behaviour Often a symptom of another, higher level, problem Attempts to address wicked problems often lead to unforeseen consequences Wicked problems hardly ever sit conveniently within the responsibility of any one organisation Causal relationship Role of rent Conspiracy against public Erosion of trust Grey areas Are there complementary solutions?
- 4. Rents and rent seeking • Economic rent – income paid to a factor of production in excess of that which is needed to keep it employed in its current use/in excess of opportunity cost – Ricardian definition: return generated by an element of fixity of supply in a factor of production • Rent seeking – attempt to obtain economic rent by manipulating the environment in which economic activity occurs, rather than by creating new wealth – expenditure of resources and effort in creating, maintaining or transferring rents; could be legal or illegal (Khan, 2000) • Relationship between rents, competition and corruption – increased competition - decreased economic rent – reduced corruption – Increased corruption- decreased competition- greater rents to be extracted from existing firms by corrupt officials
- 5. Types of rents • ‘Good’ rents- e.g. innovation rents, certain industrial policy rents • ‘Bad’ rents- e.g. created and maintained through anti-competitive behaviour and regulation • Both good and bad rents entail rent-seeking costs; aim is to minimise rent-seeking costs in generation of good rents
- 6. Correlating competition and corruption • Low levels of competition correlate with high levels of corruption • Both competition and corruption are measured using proxies: – Proxies for competition: • • • • competition from foreign firms distance to trade proportion of total exports accounted for by fuels, minerals and metals concentration levels, market dominance, barriers to entry etc. – Proxies for corruption: • degree to which business transactions involve corruption or questionable payments • Gastil Index of political rights, expected to exert an influence on amount of monitoring of corrupt activities • surveys in a number of countries asking top and middle managers the extent to which improper practices (like bribery) prevail in the public sphere etc. • perception surveys/indices • Range of other factors that impact on levels of corruption (freedom of press, levels of democracy and civil liberties etc.)
- 7. Correlating corruption and competition • But causality can run the other way: high levels of corruption can result in reduced competition: • official realises he has more cream to skim from existing firms if he limits competition through raising barriers to entry • firms lobby or bribe the official to prevent entry or to turn a blind eye to anti-competitive behaviour • patent abuse can extend duration of patent monopolies
- 8. Forms of corruption • Public service corruption: • abuse of gate-keeping functions and discretionary decision-making powers of public servants, creating market imperfections • abuse of industrial policy related rents • Political corruption: to create and maintain political stability of ruling elite • existing fiscus and tax base insufficient for redistribution to maintain political stability, and engage in corrupt behaviour through patronage • in rare instances may result in political stability that allows for economic growth. But in others, can lead to a failed state
- 9. Drivers and effects of Neoclassical corruption (Khan, 2006) Khan, M. (2006), “Determinants of Corruption in Developing Countries: The Limits of Conventional Economic Analysis”, published in Susan Rose-Ackerman ed. (2006). International Handbook on the Economics of Corruption. Cheltenham: Edward Elgar.
- 10. Drivers and effects of Statist corruption (Khan, 2006)
- 11. Drivers and effects of Political corruption in developing countries(Khan, 2006)
- 12. Discussion questions • Is there a role for competition authorities in addressing regulations that restrict market access thus compromising competition and generating rents? – Competition authorities advocate against unnecessary and burdensome regulation thus lowering entry barriers, while simultaneously opportunities for corruption – Advocate for reduced discretion in regulatory decision making – Enforcement supports ease of entry – Conduct regular impact assessments of regulatory environment – Increase use of tools like market enquiries
- 13. Discussion questions • Are there competition-friendly approaches to industrial policy, approaches that strengthen the prospect of generating ‘good’ rent and that minimize rent-seeking opportunities? – Danger of on-going state support creating and maintaining entrenched monopoly positions – But question is not whether there should be industrial policy, but how it is implemented; carrot and stick method- reward and incentivise successes; punish failures (Rodrik, 2007) – Policy can be designed to support multiple firms in an industry that compete with each other – Regularly review, monitor and evaluate the programme – Increase transparency and accountability
- 14. Discussion questions • Are bid-rigging cartels protected by corrupt conduct and is there merit in simultaneously tackling horizontal collusion (anti-competitive conduct) and vertical collusion (corrupt conduct)? – Large scale, long-standing bid rigging cartels in public infrastructure projects unlikely not to have a vertical link with corrupt public official/s – Criminal justice authorities co-operating with competition authorities could increase deterrence – Exposing corruption could be extended as part of leniency programmes – Increase transparency- but this could facilitate collusion?
- 15. Discussion questions • Is certain of the conduct that creates and maintains dominance, and the rent that it generates maintained by mechanisms best addressed by anti-corruption enforcement? – Lobbying • • Overcoming information asymmetries or exercising political influence Party political funding – Privatisation and previous state-owned enterprises
Hinweis der Redaktion
- No definitive formulation: Unlike natural science problems, public policy problems like how to solve poverty are not clearly formulated and have multiple ‘solutions’ depending on how the problem is perceived by different policy makers. For wicked problems, the process of formulating the problem is the same as the process of solving it. E.g. if the formulation of the poverty problem is that poverty is due to low income and low income is due to poor education levels, then the solution may lie in targeting improvements to the education system. But if the formulation of the poverty problem is that poverty is due to poor health of the population, which results in fewer work days and subsequent lower income, then the solution may instead lie in targeting the health sector.Unstable: ‘moving target’ – the nature of the problem evolves over time. For instance, environmental or climate change related problems are constantly changing. Other examples of moving targets in terms of constraints or evidence involved in understanding the problem: legislation, scientific evidence, resources, political alliances are evolving at the same time that policy makers are trying to address the policy problem.Many interdependencies and multicausal: Crime in the streets could be caused by general moral decay, few job opportunities, poverty, lack of gun control etc. “In dealing with the use and effects of illicit drugs, for example, there is tension between the goal of minimising harm to existing drug users via measures such as the provision of safe injecting rooms and clean needles, and the goal of sending a clear message that illicit drug use is illegal.” “The disagreement among stakeholders often reflects the different emphasis they place on the various causal factors. Successfully addressing wicked policy problems usually involves a range of coordinated and interrelated responses, given their multi-causal nature; it also often involves trade-offs between conflicting goals”No clear solution, but solving involves changing behaviour: no right or wrong answer, but good or bad responses to the problem. Traditional levers used to influence/change citizen behaviour—legislation, fines, taxes, other sanctions.Often a symptom of another, higher level, problem: same crime on the streets example- higher level reason might be poverty.Attempts to address wicked problems often lead to unforeseen consequences: “It has been asserted, for example, that the success of policies designed to reduce atmospheric pollution in the USA and Western Europe may be partly responsible for an apparent increase in global warming due to the impact of a reduction in sulphur particles in the atmosphere on the formation of clouds that trap heat in the atmosphere.”Problem of obesity in children: could be targeted by removing unhealthy food from school canteens (a narrow, or ‘tame’ solution).An unintended consequence and a reassertion of the wicked problem may be that more children no longer buy their lunch at school canteens but instead miss lunch, save their lunch money, and buy junk food at the shops on the way home from school. This is also a good example of how a tame solution can exacerbate the problem—some children may now eat more unhealthy food than they did previously, and they miss their lunch.Wicked problems hardly ever sit conveniently within the responsibility of any one organisation: “environmental issues cannot be dealt with at any one level of government. They require action at every level— from the international to the local—as well as action by the private and community sectors and individuals.”. This is particularly useful for corruption and competition.
- Gastil Index includes political rights and civil liberties: fair electoral laws, equal campaigning opportunities, fair polling; rights to property, independence of the judiciary, freedom from government corruption etc.