South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Absolute power corrupts absolutely
Published: The Kathmandu Post, 30 July 2004
By: Ratnakar Adhikari

The popular dictum of Lord Acton that "power corrupts and absolute power corrupts absolutely" remains valid even today. Since history is replete with the examples of the abuse of power, there is little room for providing benefit of doubt to the power holder ? be it in politics or in the market. Therefore, it is necessary to keep a closer watch on the power holder and his/her tendency to abuse the same, and develop a mechanism to control such power. An analogy could be drawn between the holder of market power, an extreme example of which is a monopolist (as elaborated below), and the holder of political power, an extreme example of which is a dictator. The table attempts to do the same.

While democracy is the best system of political governance as it provides better choices to the electorate, market oriented economy offers the best system of economic governance as it provides better choices to consumers, and ensures efficient allocation of scarce resources. While electorate can vote corrupt politicians out of power, consumers can vote abusive business enterprises out of the market with their purse. However, either of the above mentioned scenarios is not that simple. In both the situations, access to information, knowledge, capacity, level of education and awareness, and above all unity among the ?voters? are a must.

Theory of political economy suggests that both voters and consumers represent large, diverse and heterogeneous groups and it is almost impossible to organise them. Therefore, certain checks and balances should be created by the State to contain the possibility of abuse of power.

While there is no short cut and surest way to regulate the behaviour of a dictator unless there is a massive political revolt; it is, fortunately, possible for the State to regulate the behaviour of those business enterprises that hold market power. The need to regulate such behaviour is much more pronounced in the case of Nepal. This is because due to membership to the WTO, threats from the multinational corporations are likely to increase in days to come.

Market power is defined as "ability to raise prices without affecting sales." There are various means to obtain market power. Monopolists invariably possess such power. If monopoly in question is a private enterprise, it is more likely to abuse the same, compared to a public monopoly. This is because the latter has some sense of responsibility towards the society in general and consumers and tax payers in particular.

Another way of obtaining market power is through collusion ? in a typical oligopolist market structure, where number of producers/sellers and suppliers are limited. When the business enterprises join hands to form a cartel, they can collectively obtain almost same degree of power as a monopolist. Witness the market power of the cartels operating through their trade associations in Nepal. Banking, foreign exchange dealing, sugar, brick, colour photographs and airlines sectors are the glaring examples.

Business enterprises with dominant market share also possess market power. However, due to presence of ?competitive fringe? they are not likely to act as monopolists. Nonetheless, the possibility of abuse of market power cannot be ruled out. Therefore, there is a critical need to enact a strong competition law, complemented by an independent, fair and effective competition authority.

If we look at the examples around the world, most countries have enacted competition law concomitantly with the liberalisation of their economy. The process of enacting the same has accelerated after the WTO came into being. At present, there are 100 countries in the world that have already enacted the competition law and 29 odd countries are in the process of doing the same.

Though we are required to enact a competition law by 31 July 2004 (which is incidentally day after tomorrow), as per the commitment made to the WTO at the time of accession, we will miss the deadline in all probability. Since we do not have good reputation of honouring our commitment in the international community anyway, missing this deadline might not be a matter of concern for many of us. However, we should at least try to minimise our reputation loss by enacting the competition law at least in another one month or so ? if not to meet the commitment made at the WTO, then to control the potential abuse of market power and prevent the exploitation of already impoverished consumers.

It is also necessary to understand that enacting a weak competition law and providing the responsibility of implementing the same to a governmental agency will not serve the purpose. What is required is a strong competition law, with necessary checks and balances.

Absence of an independent competition authority can be disastrous as proven by the example of Pakistan. In late 1998, when firms of Pakistan increased the price of cement bags by about 75 per cent overnight, the Monopoly Control Authority (MCA) of Pakistan investigated and discovered a cartel. After long negotiations, the MCA decided to levy fines on the major offenders, who were market leaders, and ordered a reduction in price. Instead of implementing the orders, the industry reacted by accusing the government of market interference. The government intervened and despite the MCA?s theoretical independence, persuaded it to close the case. The lesson learnt is that not only theoretical independence matters but also that independence in practice is crucial.

Therefore, in keeping with global reality and taking a cue from the examples of our neighouring countries like India, Pakistan and Sri Lanka, which have revised or are in the process of revising their competition laws, what is also required is to have an independent competition commission ? insulated from political interference and armed with the power of investigation and prosecution. Only then, will we be in a position to regulate the tendency of abusing market power.

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