Competitiveness in Brazil

1
Competitiveness in Brazil
Council of the Americas Brazil Study
Group Competitiveness Panel New York February
24, 2006
Gesner Oliveira Former president of CADE (Brazil)
2
Summary

• Seven stylized facts of the Brazilian economy
• Competition and private sector
• Brazilian competition policy and regulation in
  historical context
• Challenges for competition and regulatory
  policies in the Brazilian case

3
Major points

• Brazilian competition policy and regulation still
  present serious limitations.
• Best practices from OECD countries are not
  enough. Institutional building and development
  perspective are essential.

4
1. Seven stylized facts about the Brazilian
economy
5
Seven stylized facts about the Brazilian economy

• Brazil is an average-sized economy .
• Reasonable degree of industrial diversification.
• Vocation for high growth rates during the 20th
  century but growth has slowed down in the past 20
  years.
• Chronic inflation during a great part of the 20th
  century but the problem has been overcome after
  the Real Plan.
• Bad social indicators considering the level of
  GDP.
• Brazil is a global trader.
• Relatively small degree of trade liberalization,
  although it is recently growing.

6

• 1.Brazil is an average-sized
• economy

7
Brazil as an average-sized economy

• Official name República Federativa do Brasil
• Capital Brasilia
• Population184.2 million
• Annual population growth rate 1.4
• Area (km2) 8,511,965
• GDP US603,9 million
• GDP per capita US3,326

Source IBGE (2005)
8
GDP Ranking
Data include the French overseas departments of
French Guiana, Guadeloupe, Martinique, and
Réunion. On 12th December the National
Statistic Office revised the GDP from U1,665,000
to U1,980,000
Source World Development Indicators database,
World Bank, 15 July 2005
9
1.2. Reasonable degree of industrial
diversification
10
GDP composition by sector
Source IBGE
11
GDP composition over time
Services
Industry
Agriculture
Source Boneli (2001) in Estatisticas do Século
XX- IBGE
12
1.3. Vocation for high growth rates during the
20th century but growth has slowed down in the
past 20 years.
13
Brazilian Growth in Perspective Average Annual
Growth Rates ()
Source IBGE
14
1.4. Chronic inflation during a great part of the
20th century but the problem has been overcome
after the Real Plan.
15
Brazil had several monetary reforms...
16
Inflation has come down(1944-2005)
Source IGP-DI (FGV) accumulated at the end of
the year
17
1.5. Bad social indicators relative to the degree
of development
18
A few social indicators...
Poverty Headcount Index
Source World Bank (2004)
19
1.6. Global trader
20
Major markets for Brazilian exports
Source Secex (2005)
21
Brazilian Imports
Source Secex (2005)
22
1.7. Relatively small degree of trade
liberalization, although it is recently growing
23
Trade openness has increased
Source Secex
24
2. Competition and the private sector
25
Do anti-competitive practices present major or
severe obstacles to the operation and growth of
your business?
Source World Bank (http//rru.worldbank.org/Enter
priseSurveys)
26
Do anti-competitive practices present major or
severe obstacles to the operation and growth of
your business?
Source World Bank (http//rru.worldbank.org/Enter
priseSurveys)
27
Are Government officials interpretations of
regulations consistent and predictable? ()
Source World Bank (http//rru.worldbank.org/Enter
priseSurveys)
28
3. Brazilian competition policy and regulation in
historical context
29
The three phases of competition policy in Brazil
1937
1988
2005
1962
1991
1994
CADE is created
Redemocratization
SNDE is created
The system CADE/SDE/SEAE is created.
Closed Economy
Proposal of a competition law reform
Transition
Open Economy
30
A learning period was necessary...
Source CADE and Farina (1990)
31
Five changes explain the increasing importance of
competition policy

• Trade liberalization
• Privatization
• Regulation
• Stabilization
• Conditionality and/or soft convergence

32
Trade liberalization has been a gradual process
Source WTO, Silber (2002) and Kume et al. (2000)
33
Privatization reduced direct State intervention
in the Brazilian economy
1995 onwards Emphasis on public utility services,
concessions restructuring and privatization of
public banks (State level)
1980s Reprivatization in small scale (US 1 bi)

• 2003
• Slowdown
• Remaining operations in banking infrastructure
  sectors
• - The PPP instrument

1991/94 Formerly strategic state-owned companies
(steel, fertilizers, petrochemical) (US 8,5 bi)
34
And privatization was important for
infra-structure
Source BNDES
35
But large sectors remained under state control
 
Degree of Privatization
Source Oliveira and Machado
36
Privatization in infra-structure requires
regulation

• 1991-1994
• privatization in state enterprises in steel,
  petrochemicals and fertilizers.
• 1995-1998
• sale of state-owned companies in
  telecommunications, electricity and railroads

37
Highlights in the evolution of regulation in
Brazil
1995-2000
1996-01
1997-2001
1995
Concessions Law
Privatization of electricity
Regulatory Agencies
Privatization of telecommunications
38
Regulatory agencies were established after the
second half of the nineties
2002
1996
1997
1999
2000
ANEEL (Electricity)
ANATEL (Telecom)
ANP (Petroleum and Natural Gas)
ANVISA (Sanitary Control)
ANS (Health Plans)
ANA (Water Resources)
ANTT (Ground Transports)
ANTAQ (Water Transports)
39
Brazil had the wrong sequence in some sectors
40
In theory, we know the boundaries between
regulation and competition policy
Market Structures
Perfect Competition
Natural Monopoly
Competitive
Non-Competitive
Competition Policy
Regulation
41
But the boundaries are not well-defined in Brazil
42
Model 1 antitrust exemption
TR
CL
ER



CA
RA
X
X
X
CA - Competition Agency CL - Competition Law /
TR - Technical Regulation ER - Economic
Regulation / RA - Regulatory Authority
43
Model 2 concurrent jurisdiction
TR
CL
ER


CA
X
RA
X
X
X
CA - Competition Agency CL - Competition Law /
TR - Technical Regulation ER - Economic
Regulation / RA - Regulatory Authority
44
Model 3 complementary jurisdictions
ER
TR
CL
ER


CA
X
RA

X
X
CA - Competition Agency CL - Competition Law /
TR - Technical Regulation ER - Economic
Regulation / RA - Regulatory Authority
45
Model 4 antitrust regulation
TR
CL
ER
X
X
X
CA
RA



CA - Competition Agency CL - Competition Law /
TR - Technical Regulation ER - Economic
Regulation / RA - Regulatory Authority
46
The interaction between the competition authority
and the regulatory agency Total values and
percentages
Source Oliveira et al. (2005)
47
Formally, Brazilian agencies are independent
48
Independence index by country
Source Oliveira et al. (2005)
49
But in practice, real independence is low.

• - too many political nominations
• - delays
• - some agencies are captured by the regulated
  firms

50
The international experience helps

• Competition law as a conditionality for
  structural loans
• The Singapore Ministerial of 1995
• The International Competition Commission (ICN) in
  2001
• The Global Competition Forum

51
But the standard model of OECD countries does not
suffice
52
4. Challenges for competition and regulatory
policies in the Brazilian case
53
Seven reasons why implementing competition policy
in LDCs is different...

• Barriers to entry
• Transaction costs
• Lack of competition culture
• Political economy problems are more severe

• Size of the informal sector
• Size of the market
• Potential for increasing efficiencies

54
4.1. Developing countries have larger informal
sectors
Source Doing Business, World Bank (2005)
55
Development and Informality

Source Guedes (2005)
56
A large informal sector has important
implications...

• Dual markets in several sectors
• Market power of dominant formal firms may be
  overestimated
• Cartel analysis becomes more difficult
• Predatory pricing analysis becomes more complex

57
The usual procedure is not enough
Relevant Market
Denunciation
NO
High entry barriers?
File
YES
Is there excess of installed capacity OR
possibility to increase it?
NO to all
File
YES
NO to all
Can the firm finance itself OR get funds in the
market?
File
YES
If Price gt ATC
Price-cost analysis
File
If Price lt AVC
Punishment recommendation
IF AVC lt Price lt ATC
If at least one occurs

• Explanations for Price lt ATC
• Sudden demand concentration
• Excess of installed capacity in the
• industry

File
Predation
Punishment recommendation
58
Predatory price analysis is already complex
Although a firm might choose prices strategically
to exclude rivals even without going as far as
below costs, those cases are not punished
(type-II error) to avoid type-I error, because
that kind of error could discourage competitive
behavior.
Dominant Firm
Competitive Behavior
Predation
Punish
Policy Makers
Dont Punish
59
4.2. The size of the market matters

• Requires cooperation with other national
  competition authorities
• Smaller markets tend to have higher concentration
  ratios
• Under liberalized markets, whole sectors may have
  to be consolidated in order to gain economies of
  scale

60
Cross-border mergers are significant
Source KPMG
61
4.3. Transition to liberalization implies greater
potential for efficiencies

• In mature economies authorities tend to be
  skeptical about the magnitude of efficiencies
  which can be obtained through mergers
• But transition economies may present extremely
  large efficiency gains.

62
Estimates of cost reduction in the Ambev merger
(1999)
63
4.4. Resources cannot be reallocated easily in
the economy

• High entry barriers
• Higher transaction costs prevent new firms from
  contesting quasi-monopolies
• infra-structure in developing economies is
  precarious

64
4.5. High transaction costs
Source World Bank
65
Precarious infrastructure Brazil
Evaluation criteria Regulatory paradigm, legal
matters, taxation, institutional matters and
investment level.
66
Infrastructure ComparisonLatin America X Asia
Source Dollar (2003)
67
4.6. Lack of competition culture

• Market and market institutions are in the process
  of being created.
• Competition advocacy becomes crucial. But it is
  not only preaching

68
4.7. The political market failure is more severe

• New agencies have to fight for a share of the
  budget
• No specific groups benefit from successful
  antitrust enforcement
• Issues are often distant from the consumers
  experience
• It is not trivial to show how discussions of
  abuse of market power in intermediary and capital
  goods market will affect the final consumer

69
Reminding the major points

• Brazilian competition policy and regulation still
  present serious limitations.
• Best practices from OECD countries are not
  enough. Institutional building and development
  perspective are essential.

70
Thank you!

• Further information...gesner_at_fgvsp.br
• go2145_at_columbia.edu www.gesneroliveira.com.br