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A paper based on a speech given by John Fingleton, OFT Chief Executive, at the Annual Charles River Associates Conference in Brussels
Download Competition policy in troubled times (pdf 116 kb).
Summary
While recent years have witnessed growing public confidence in the ability of competitive markets to deliver positive outcomes, the credit crunch and the recession have shocked markets, policy-makers and the general public and risk damaging that confidence.
Recession is potentially hostile towards competition policy: the less visible and less immediate costs of restricting competition can look more attractive to policy-makers faced with a range of unpalatable options. Policies to relax competition in the US in the 1930s and in Japan in the 1990s arguably added to the duration of recession in both countries. Learning from history and the robust economic evidence linking competition to productivity growth, we need to ensure that today's solutions do not inadvertently become tomorrow's problems.
It is essential that the causes of the credit crunch are properly diagnosed so that the policy response is targeted 'micro-surgery' rather than drastic amputation. If we mistake regulatory failure for market failure, we risk undermining the source of much of the wealth creation that came from the opening of markets to competition.
Intervention to rescue the financial system from systemic collapse in exceptional circumstances can be crucial, but should not be seen as a reason to suspend the importance of competition in other sectors, either via State aid, anti-competitive mergers or cartels.
Subsidies are rarely ideal: they are costly for the taxpayer, can prop-up less efficient firms, create dependency, and ultimately damage competitive incentives. Restrictions on competition are worse. In addition to higher consumer prices and the inefficiency, they are less transparent and can result in permanent changes to market structure. Ad hoc changes to the competition rules can also remove consistency and predictability for business, with additional harm to efficiency. Naturally, incumbent business will rarely object to subsidies or restrictions on competition.
The OFT – and other competition agencies – need to be able to respond quickly to changing priorities, and display a degree of pragmatism in recognising times when other policy interests may over-ride competition policy. At the same time, our role as advocates of competition, within government, with fair-dealing businesses and beyond has never been more important; supporting governments in tackling powerful private vested interests whose solutions would cost us dearly well into the future.
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