Fighting Corruption and Promoting Competition

Background paper by David Lewis, Executive Director, Corruption Watch, South Africa

27 February 2014Global Forum on Competition

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

Addressing ‘wicked’ problems • ‘Wicked’ in that they are resistant to resolution rather than evil

Characteristics of a wicked problem:

– 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

• But closely related – – Causal relationship– Role of rent– Conspiracy against public– Erosion of trust– Grey areas

• Are there complementary solutions?

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

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

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.)

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

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

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.

Drivers and effects of Statist corruption (Khan, 2006)

Drivers and effects of Political corruption in developing countries(Khan, 2006)

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

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

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?

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