Centre on Regulation and Competition WORKING PAPER SERIES

The paper aims to examine some of the critical factors that make the implementation of effective competition policy difficult in developing countries. The paper begins by reviewing the variety of factors that have accounted for the rise in interest in promoting competition in developing countries over the past decade. It briefly reviews the various theoretical perspectives on competition as a background to understanding the range of approaches put forward for competition policy. A number of policy-related propositions, drawn from the theoretical literature, are examined and related to policy and practice in developing countries. The discussion focuses on the rivalry for the acquisition of assets in terms of entry and exit constraints and on the rivalry that exists in the use of assets, by considering the factors that facilitate collusion. It provides reasons why anti-competitive practices may be more difficult to detect in developing countries and why competition agencies face obstacles in implementing competition policies. INTRODUCTION Interest in promoting competition in developing countries has increased over the past decade. Despite differences, developing countries are generally characterised by lower degrees of market competition than their industrialised country counterparts. Until relatively recently, few developing countries had OECD type competition policies. By the end of the 1980s up to a dozen had antitrust legislation and institutions (Gray and Davis, 1993). By the early 2000s this has grown considerably. The heightened interest in competition in developing countries has various explanations. In part, it is undoubtedly linked to the wave of neoliberal economic reforms introduced since the 1980s, and in particular to the issues raised as a result of privatisation. To many, privatisation was a response to the government failures encapsulated in the notion of the ‘grabbing hand of government’, a term coined by Shleifer and Vishny (1998). This, drawing on public choice theory, indicated that the key problem of state enterprises was government interference in the ir activities, which leads them to pursue political rather than economic goals. Privatisation was viewed as a policy that would restrict the future influence of the state on privatised enterprises. This view sees government control, and in particular regulations, as the main vehicles for enriching politicians and promoting corruption and,