Economic Recovery

Effective competition and competition policy can aid economic recovery.

Economic downturns, although temporary, tend to increase short-term protectionist pressures to relax competition that can have long run effects.  Relaxing, suspending, or eliminating competition policy during an economic crisis can harm consumers and producers by slowing, rather than promoting economic recovery.  History demonstrates that the costs of restrictions on competition are substantial and often only become evident in the long run. They are also extremely difficult to remove or reverse.

Relaxing competition policy is an ineffective, and even counterproductive, means to boost the economy and encourage recovery.  A downturn requires firms to adapt and change and competition provides adequate incentives for this to take place.  Competition policy is designed to counteract market failure, and in particular the anticompetitive exercise of market power.  Firms with market power have incentives to restrict output, to raise prices, and to reduce their levels of investment and innovation.  In general, therefore, policies which result in increased market power can prove counterproductive, since further restrictions in output and productivity are likely to exacerbate the effects of recession and slow the recovery. These policies can also reduce the ability of new firms to enter the market and further hinder growth.               

History demonstrates that a temporary relaxation of competition policy would be hard to reverse.  This is partly because the costs of the relaxation would tend to fall on the customers of firms, who are often a large and disparate group of individuals; while the benefits will typically flow to a smaller group, namely the shareholders and management of certain firms in the industry in question.  These firms will have a much stronger incentive than numerous unaffiliated consumers to organize and expend resources to air their views. Restrictions on competition are also typically less transparent than other more direct policy instruments, and thus their effects are harder to spotlight and critique.

A relaxation of competition policy may appear, at least superficially, to be a relatively ‘cheap’ option (in that it will not involve spending funds from taxpayers), however, it is an inefficient means to assist firms in financial difficulty.  Any relaxation of competition policy will weaken firms’ incentives to be more efficient, render them less competitive internationally (see discussion of Lewis and Porter research findings in “growth” section), and penalize successful firms.

State support and special policies that protect incumbent firms from competitive pressures through artificial barriers can also lead to distortions of competition:  in addition to weakening the recipient’s incentives to be more efficient, competitors’ incentives will be affected as results are achieved by state support rather than business decisions. See http://ec.europa.eu/competition/recovery/financial_sector.html.

Consistent with these observations, past government policies to relax competition policy in periods of economic crisis have been economically harmful.

Resources:

  • OECD, Regulatory Reform for Recovery: Lessons from Implementation During the Crisis, 2010 identifies lessons learned in crisis situations about how regulatory reform, by enhancing regulatory quality and applying competition policy and market openness, can foster recovery and long term sustainable growth. It builds principally on case studies of regulatory reform responses to crisis episodes in Japan, Korea, Mexico, Sweden, and the United Kingdom.
  • For analyses of the impact of the 2008 financial and economic crisis on the enforcement of competition law, see Competition Law in Times of Economic Crisis: In Need of Adjustment?, Ed. Jacques Derenne, Massimo Merola & José Rivas. Bruylant, 2013. See how DG Competition has addressed the 2008 financial downturn, here: http://ec.europa.eu/competition/recovery/index.html
  • Competition Policy and Financial Crises - Lessons Learned and the Way Forward is a report published by the Nordic competition authorities in September 2009 concerning the the role of competition policy in the financial crisis. Michael Böheim, Competition policy: ten lessons learnt from the financial crisis, Empirica, Aug 2011, Vol. 38 Issue 3, p315, examines 2008-2010 financial crisis and competition policy and enforcement.
  • For an older historical example, one policy response to the Great Depression in the U.S. was the National Industrial Recovery Act of 1933 (NIRA).  The NIRA attempted to suspend certain aspects of the U.S. antitrust laws and permitted firms to collude to fix prices and quantities in some sectors provided that industry raised wages above market-clearing levels.  It is a widely held view among economists that these policies did not help the economy recover from the Great Depression and may even have exacerbated the Depression. The NIRA diminished the responsiveness of price to output and thus prevented the economy’s self-correction mechanism from working. See, e.g., Cole and Ohanian, New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis, 112 Journal of Political Economy, no. 4 (2004) find “that New Deal cartelization policies are a key factor behind the weak recovery, accounting for about 60 percent of the difference between actual output and trend output” and lengthened the Great Depression by seven years, and Harkrider, Lessons from the Great Depression, 23(2) Antitrust (Spring 2009), states that “firms in cartelized industries are unlikely to innovate, especially where such innovation leads to new products and competitors that are likely to challenge incumbents.  Thus, it is perhaps not surprising that according to one study, there were few, indeed, almost no, new products introduced in the late 1920s and 1930s that could drive increases in consumer spending or investment”.
  • In contrast, in Korea, responses to the 1997 crisis showed an increasing willingness to rely on the market to correct business failures and to drive growth. The failure of one of the largest chaebols, Daewoo, marked an end to the ―too big to fail‖ policy for the biggest chaebols. This signalled that decisions on market entry and exit would be left to markets and thereby increased the credibility of the competition regime.
  • Almunia and Perez Motta, The Competition Factor, April 2013: http://www.project-syndicate.org/commentary/how-pro-competition-policies-can-boost-economic-recovery-by-joaquin-almunia-and-eduardo-p--motta