Beyond Competition

An  EPAC paper Promoting Competition in Australia was indeed of seminal importance in clarifying the debate about competition policy in Australia.

The purpose of the attached paper, Beyond Competition, is to suggest building on your foundation, towards a solution to some still unresolved problems.

In particular, it argues that:

a competition is necessary but not sufficient for competitiveness (noting weaknesses which remain in Australia's private sector despite being exposed to competition, and in the most competitive market economy in the world, the USA);

a no one unilaterally determines their own performance because of the importance of economic institutions, most of which lie outside government and whose development is constrained by a 'chicken and egg' problem;

a the need to do more than wait for such institutions to emerge arises from East Asian abilities to accelerate the evolution of the whole economic framework. How this works is a major 'paradigm' challenge, but it should be recognised that:

b Hayek's principal conclusion (though very obscure to the rational Western mind) is a central component of the thought processes of a civilisation;

c productivity and competitiveness do not mainly depend on the 'efficiency' which competition promotes; and

d gaining market power is the economic objective in East Asia (rather than being an obstacle to consumer benefits)

a Australia may not yet be really advancing its position.

a possible responses by economists include:

b development (and application) of an evolutionary economics;

c emphasis that knowledge is more economically important than capital; and

d development of a new basis for competition policies (which would be evolutionary, rather than based on static or dynamic structures).

8/8/96

BEYOND COMPETITION

The purpose of this paper is to suggest the need for more than competition in developing Australia's economic capabilities. A seminal EPAC paper (Promoting Competition in Australia(PCiA) , 1989) is used as a starting point for this present analysis.

The major points in PCiA were that:

· competition constrains market power, and promotes technical and dynamic efficiency

· there is conflict between competition and various other goals (eg the size required for scale economies; social goals; countervailing power for international commodities trade), but each could be achieved in ways consistent with a competitive economy

· market power yields monopoly profits which can not be prevented, but abuses of such power which damage competitors can be controlled.

· self regulation is an alternative to legislation but requires care to avoid restricting entry

· anti-competitive practices outside corporations (eg professions) should be restricted

· regulation restricting market entry or favouring government corporations need review.

· price surveilance is a second best option

1. Being Exposed to Competition doesn't Ensure Competitiveness

While competition provides an incentive to be productive, it does not ensure the capability required to do so. For example Australia's private sector has operated in a 'more or less' competitive environment, but remains weak. And, the Karpin report (Enterprising Nation, 1995) identified serious deficiencies in Australian management, and suggested the particular need for both training and direct international experience.

Similarly: 'Some of Australia's most important deficiencies have little to do with governments and more to do with the performance of private sector management. Australia ranked 39th in the category of competent senior management and 37th for entrepreneurship and innovation. Instead of spending so much time lecturing governments, it seems that Australian managers would be better occupied lifting their own game. Unless they do so ... the opportunities created by opening Australia up to the global market place will be mostly squandered' (Toohey B. 'Economy slipping away', Sun Herald, 2/6/96)

And in Queensland, in particular, business seems to be heavily dependent on government and on foreign investors to take economically significant initiatives (despite competition). This dependence may be the major factor in Queensland's poor performance in capturing value from the state's rich natural resources, because government is not able to ensure an ability to capture value, and foreign investors are not motivated to do so.

' ... the draft copy (of the State Economic development Strategy) I saw was just another 'economic vision' document' said one Brisbane based senior executive. .... (From Government) We want projects that generate jobs in the private sector ....' (Watson R. 'Government visions get rolled in poll', Courier Mail, 29/7/96)

The problem is not confined to Australia. The most competitive market economy in the world (the USA) has been largely confined to creation of low value added (and low wage) economic activities for about two decades.

2. Firms do not Unilaterally Determine their own Performance

One problem is that any firm's ability to compete depends on the effectiveness of the economic system as a whole, which it is beyond individual entities to do much about, no matter how much competition they face.

'An economic rationalist would tend to say: 'Lets have a market', and leave it at that. But it is a lot more complex as they discovered in Russia .... you need to evolve a whole set of institutional structures. In the Soviet Union they missed 100 years of evolution of institutional structures. As a result ...(they) did not have a body of case law on patents and needed to train a generation of accountants who could perform such tasks as independent evaluation of companies ... Ball argues that there is no sense in deregulating the economy and then trying to plan the institutional structures. It has to evolve ... and it takes time for that to happen ... the institutional framework he has in mind covers everything from families and the values they inculcate to the legal, political, educational, industrial relations and welfare systems.' (Stekete M. 'The Prophetic Professor', Australian, 22/7/96, quoting Professor Ray Ball)

It is often assumed that the economic 'institutions' required to support an effective market economy are mainly in the province of government. However the most important (say) 70% of them are not. For example, in Queensland, institutional weaknesses include: the absence of capability for sophisticated strategies in business; financial institutions which are oriented towards real estate rather than business; limited access to market intelligence - probably due to the dominant role of multinationals; and limited effective business support for innovation.

Professor Ball argued that an economy's institutions need to evolve. And PCiA correctly pointed out that a competitive market allows change to occur (ie that such a market is dynamically efficient). It certainly is better than a regulated market in this respect, but it suffers from a relatively slow response to change (ie it may not be dynamically effective).

For example, the 'institutional' capacity required to support a certain type of innovation by enterprises includes: appropriate forms of (venture) financing; appropriate skills and arrangements in universities; and a pool of skilled managers to support entrepreneurs etc. If those arrangements exist, such innovators will succeed. If they do not exist, then they can be very slow to evolve (because each institutional element faces a 'chicken and egg' problem - ie it is not worth while establishing any element until all the others already exist). This is the ultimate problem of economic development. Australia's traditional governmental solution to this, directly providing assistance services to firms, makes no contribution to developing the economy.

In particular, if only competition is encouraged in developing the Gateway proposal for Brisbane's Ports, then users of land or infrastructure developments would be more limited in both number and value adding potential than might be achieved in a stronger institutional environment. For example, important new demand for port facilities in Brisbane now includes fairly low value added activities (eg importing cars for the seaport; and passengers linked with tourism for the airport). To make a major economic contribution it would be necessary also to create an institutional framework in which higher value added activities could be successful.

Economists have focused on proving the value of a competitive micro-economy, but have not looked at the non-economic institutional framework required for this to operate. This seems increasingly problematical.

In the late 1970s, and throughout the earlier years of the 1980s, neo-liberalism was a compelling response to otherwise intractable dilemmas. The manifest failing of corporatist policy in Britain and the collapse of central planning throughout the Soviet bloc vindicated market institutions as the chief organising structure in any modern economy. The old 'systems debate', between 'planning' and 'markets' was resolved decisively on the terrain of history. By the late 1980s, however, that debate receded and a new debate began to emerge - a debate about the varieties and limitations of market institutions, and about their cultural and political preconditions .... In Western democracies such as Britain, Canada and New Zealand, conservative governments animated by free market ideology look, impotent and aghast, into an electoral abyss ...'' (Gray J., Enlightenment's Wake, 1995)

Furthermore, promoting competition without considering the institutional question can have the effect of eroding useful non-economic institutions.

For example the professions had been established to allow some market participants to act in the community interest, as well as in their own interest, by promoting ethical behaviour, and by mobilising contributions to public policy debates from a practical rather than a political viewpoint. In suggesting changes to such institutions, PCiA made no reference to analyses of the benefits and costs involved.

However the need to do more than just wait for economic and non-economic institutions to evolve, is now urgent because of the competition now coming from East Asia.

3. Hayek: The Taoists got There First

Analyses of East Asia's experience by Western economic observers (see example below) never actually look at the profound differences in the information and organisational strategies which arise in societies with a Chinese cultural heritage. Neither do they explain why others did not achieve as much from a similar starting point.

'The east Asian example is presented to prove it is possible to employ industry policies which maximise productivity by targeting specific industries. This argument looks rather unconvincing if the development path followed by the successful east Asian economies is looked at closely. All came off very low bases, which enabled them to exploit a low wage environment and to import technology and production methods ... In just about every case ... the process of strong growth has been preceeded by a major political or economic crisis. Combined with an absence of democracy ... this gave strong governments the legitimacy of national consensus that called for a focus on national growth priorities, and the overriding of the demands of special interest groups. These economies all share the useful economic qualities of a high level of domestic savings and the existence of a plentiful, flexible and competitive labour supply ... It is impossible for Australia to replicate these conditions and this makes the Asian experience largely ... irrelevant...' (Walsh M., 'The Demise of Protectionism', in James C. etal, A Defence of Economic Rationalism, 1993).

Such superficiality is inevitable because of the ultimate 'paradigm trap' which leads to the incorrect assumption that behaviours / organisations would be like their Western equivalents, and thus to an inability to understand what actually happens.

(a) Understanding

The issue can be illustrated by a core Taoist saying: 'The Tao which can be named is not the true Tao'. This is merely saying that language is too simple to accurately model reality. Yet rationality (the distinctive and powerful Western method for solving simple linear problems) assumes that language does model reality. So does science (which is able to deal with more complex stable problems by assuming that abstract concepts model reality). And so does economics as it (usually) tries to be like a physical science.

Hayek comes in to this because mainstream economic thought in Australia today endorses his insights into the economic process. 'He rejected the rationalist assumption that central authorities could possess all of the knowledge required for making economic decisions' (James C., etal, A Defense of Economic Rationalism, 1993). Hayek's seminal argument against economic planning ('The Use of Knowledge in Society', American Economic Review, Sep 1945) rests on the grounds that the information needed to do so is too dispersed and complex to be obtained by central decision makers. This is exactly the point of philosophical Taoism. And Taoism is apparently related to Shinto (Japan's traditional religion) and was the ingredient which converted: Buddhism into Japanese Zen; and Confucianism (with its resisted change) into (dynamic) neo-Confucianism.

Thus, when considering what East Asian societies can or can not do economically, it is necessary for economists to recognise that Hayek's major conclusion (which is obscure to the rational Anglo-American mind) is one key starting point for the thought processes of an entire civilisation. Many consequences which historically flowed from this have not been 'rational' or economically helpful, but have included such characteristics as:

· knowledge is used to gain power, rather than to search for truth.

· power is not equated with decision making. (Pye J. Asian Power and Politics: Cultural Dimension's of Authority, 1985). Decision making is the responsibility of subordinates (which is the basis of Japan's 'bottom up' decision making system). Power is exerted by accessing superior information through personal contacts, which is used to influence subordinates' thinking.

· the most powerful are never the most visible (Matsumoto M, The Unspoken Way, 1988). For example, democratic politics merely exists for show. Real government is by bureaucratic elite (Johnson C., 'The People who invented the mechanical Nightingale', Daedalus, Summer 1990).

· the bureaucracy consists of those who passed rigorous selection through the education system as having maximum demonstrated ability to handle information.

· industry policy has involved manipulation of information (Suzumura etal, Industry Policy in Japan: Overview and Evaluation, ANU Centre for Economic Policy and Research, Discussion Paper #156, 1987). Thus organisations and the society as a whole 'learn' faster than normal - this being the basis of MITI's vision development and administrative guidance. PCiA showed that assistance to industry in the form of transfer payments, or regulation preventing competition was not constructive. But no one considered assistance in the form of elite leadership in accelerating the evolution of strategic information flows and the institutional framework of a market economy - which is what has been involved. A similar role is played by: idealised Japanese managers; the central organisers of Japanese business groups (intelligence gathering and organising); and the leaders of offshore Chinese business groups. It is now also the method used by the economic development managers in China's Provinces.

· things are not seen in isolation. Communities are defined in terms of relationships, not of individuals. Thus the definition of competition adopted for the National Competition Policy Review, `the striving of two or more persons or organisations against one another for the same or related objects' (Independent Committee of Inquiry, National Competition Policy Review, Feb 1993), does not apply in East Asia where systems of (say) vertically intergrated persons or firms are seen as the basic elements which compete, rather than individual persons or firms.

· the market involves commercial relationships built on long term social relationships, rather than arms' length relationships under contracts and law. Restrictive practices (eg exclusion of outsider competition) is central to the workings of such a market. The abuses which would arise from this in Australia are avoided as cultures emphaisise individual responsibilities rather than rights. Also PCiA highlighted the difficulties caused where small agricultural producers negotiate with a few large processors, and the potential for exploiting market power which was often seen to require government support for producers. This issue is less important in a communitarian economy, where all commercial relationships are also social relations amongst friends.

· 'non-action' is emphasised which equates with a concern by leaders with the way things are done rather than with doing them. This is the secret of taking a long term approach. The difficulty which Western financial institutions have in taking a long term approach (which was mentioned in PCiA) does not result from poor discounting of future benefits and costs, but rather from their concern with those benefits and costs (which are always short term), rather than being concerned about the way things are done (where gains only come over a generation).

The challenge which this poses arises from a quite different means of problem solving from the rationality and science which the West inherited from classical Greece. One consequence is that Hayek's objection to 'economic planning' can be somewhat overcome (because the subordinates who make the decisions do actually have a lot of the information which Hayek pointed out that central decision makers could not obtain). However the process is not like 'economic planning' would be in a Western government.

And gains are also achieved from changing the causal relationships in an economic system rather than from using understanding of those causal processes to model the economy, which is the goal of quantitative macro and micro economics. For example, rather than using an econometric model to suggest what inputs would produce maximum outputs, managing the processes within the economy has the effect of achieving desired ends by changing the parameters in such an econometric model.

(b) Resulting Competitiveness

The competitiveness which results from this is not derived from technical efficiency, but from much more rapid organisational / whole-economy response to changing conditions. Japan has been said to have prospered due to organisational rather than technological innovation (Sata R. 'Organisational Learning: The Key to Management Innovation', Sloan Management Review, Spring 1989). According to Australian Productivity Council data, only (say) 20-30% of potential productivity gains typically comes from efficiency (ie from producing maximum output with minimum inputs). The rest can be gained mainly from quality (knowing and producing what customers value) and flexibility (the ability to quickly re-focus on their changing wants, to avoid efficiently producing a quality product which is no longer wanted).

PCiA discussed the trade-off between competition and technical efficiency (which PCiA argued has shaped trade practice law in Australia). However technical efficiency (derived from either economies of scale or economies of scope) is not the only issue in building productivity and an ability be competitive. Micro-economics recognises that more than cost is involved (eg Hilmer F. Coming to Grips with Competition and Productivity, EPAC Discussion paper 91/01, AGPS, 1991 which recognised cost, quality and service as bases for competing). But the question of whether dynamically efficient 'free' markets might not be the fastest way to adapt production to what customers value and to their changing requirements has not been considered.

The USA and Europe felt the consequences of this source of competiveness in the 1970s and 1980s and lost ground to Japan in leading industries.

'America's industrial productivity (still the strongest in the world) has grown at a rate which is three times slower than that of Japan .... Not one new product that has appeared in the last few years has been made in the United States, with the notable exception of the micro-processor. Even traditional consumer goods are no longer manufactured in any competitive way .... For high technology products the United States has only a positive trade balance in ... two sectors ... The economic deficit has growth, while America's role in the global economy has shrunk ... the external debt of the United States has increased massively ... To avoid increasing taxes, the American society has reduced its investment in infrastructure ... and has borrowed ... mostly from Japan - the amounts necessary to finance its deficit' (Attali J. 'Millenium: Winners and Losers in the Coming World Order' Times Books, 1991). [In assessing this, it should be recognised that some analysts are more sympathetic to the US performance than a French writer is likely to be, and that US international performance in tertiary and quaternary sectors has been stronger than in secondary industries]

US firms have since responded with techniques like business process re-engineering (BPR); partnerships for development; and so on, but the effectiveness of these is still uncertain and their significance has not yet been considered by economics. BPR (for example) involves a move away from emphasis on economies of scale (and scope) towards an emphasis on quality and flexibility as sources of corporate competitiveness. However it has had adverse social effects such as large scale job shedding, and may not yet have done more than stabilise the loss of key markets' share which was occurring.

Australian firms which are subjected to competition but have no support in accelerating the evolution of the economic institutions on which their effectiveness depends are at a real competitive disadvantage (eg consider the examples in Section 4 below).

PCiA argued that competition helps reduce income inequalities. It certainly provides scope for social mobility, but does not ensure this outcome because gains depend not only on an individual's performance but also on initial advantages which can be amplified (eg education or access to capital), and also on 'institutional' support. It is virtually only East Asia which has made significant relative gains in income over the past few decades. For most in the world, the inequality of wealth has been amplified.

'Since 1980 there has been a dramatic surge in economic growth in some 15 countries, mostly in Asia and the OECD with 1.5bn people. But economic decline or stagnation has affected 100 countries reducing the incomes of 1.6bn people' (Barker G., 'UN warns of grim rich poor gap', Financial Review, 17/7/96)

(c) More than Economic Welfare is Involved

In East Asia, Australia encounters communities where individuals are not valued in the same way as they are in the West, and where everyone (business, government, employees, families and even gangsters) is expected to be united in a determination that their community win. Western concepts of fair play, and universal ethics which place intrinsic value on the welfare of others are replaced by very different value systems, some of which have sustained their cultural traditions through conflicts over thousands of years.

PCiA argued that competition was desirable because market power by particular groups can reduce the benefits to consumers. However in East Asia (eg Japan) gaining market power is itself the major goal (as a means to advance the position of a cultural group). The pursuit of efficiency with the aim of benefiting investors or consumers is secondary.

'One of the most frustrating aspects of current Japanese American relations (is that) one is forever debating basic details of modern Japanese history with people who are nearly innocent of the subject but who none-the-less have quite fixed opinions about the nature of the Japanese political economy'. There are three reasons for this 'First are the ideological blinders .... caused in part by the ideological dimension of the Cold War ... (which) attempts to fit Japan ideologically into the Western camp ..... Second is the unusual ... situation in which Japanese nationalism is expressed almost entirely through economic claims and achievements. Observers who do not understand this linkage consistently misinterpret data from the Japanese economy because they assign it to the wrong people for analysis - namely to economists. By training and orientation such people are both blind to and ignorant of nationalism..... Third ... is because the Japanese economy is guided by a state strategy .... The Japanese economic strategy is comparable to the American pursuit of military strategy; and many norms of Japanese economic life - long hours, service to the group; wearing unifiorms and long term goals - are perfectly familiar to the American military ... Also like military strategy, Japan's economic strategy implies indirection, disinformation and deception in order to defeat the nation's economic competitors' (Johnson C., Who Governs Japan?, 1995)

Japan's economy is organised so that most of the economic benefits pass (not to the community) but to major corporations who are ultimately owned by banks who are in turn closely controlled by the bureaucracy. Such an economy has been described as a 'non capitalist market economy' by Japanese authors (eg Sakakibara E., 'Beyond Capitalism: The Japanese Model of Market Economics). However Japanese firms pursue market share, rather than profitability, and seek to eliminate their competition (an approach which Thurow described as 'strategic conquest', in Head to Head: the Coming Economic Battle Amongst Japan, Europe and America).

The Lords of the Rim (Seagrave S., 1995) suggests that similar motives dominate the overseas Chinese business groups whose market power in East and South East Asia and elsewhere is rapidly growing to match Japan's. That author argued that current developments can best be understood as part of harsh strategic contests between Chinese merchants and authorities which have been going on between rival clans for about 4000 years. Western societies' armies and merchants marched over this arena 200 years ago (and left behind such vestiges as Australia). Now the contest is intensifying, and the private 'armies' of these 'Lords' are again becoming active, particularly in regions, like Queensland, which have a high level of interaction with East Asia.

The traditional preference for non-military methods in such contests was identified in Sun Tzu's famous Art of War (which summarised centuries of experience).

'Everyone says victory in battle is good, but it is not. A general who wins every battle is not really skilful. To make your enemy helpless without battle is the secret. It is better to preserve a nation intact than to destroy it. To overcome rivals without fighting is the summit of skill'

While the communitarian markets are very different, traditional strategy also involves 'conforming to others' expectations (ie putting on the appearance of being the same, without actually being). The USA has not (officially) seen through this (despite the 'Strategic Impediments Initiative'), and maintains the pretence, at great cost to itself, that in Asia it is dealing with economies which are becoming Westernised.

On the other hand there is still no certainty about the long term viability of the communitarian economic systems, because:

· they contain seeds of potential instabilities (eg 'truth' varies with whoever is in power, and serious mistakes by leaders can affect whole communities);

· these systems appear to depend on acquiring knowledge (the key factor in long term economic growth) from others; and

· the rhetoric by the powerful about the basis of the region's economic success (namely 'Asian values' including filial deference to themselves) seems incorrect (See above).

None-the-less it is foolish not to understand fully what is involved because:

· Australia's fastest growing market opportunities are in East Asia.

· a great deal of Australia's trade in controlled by organisations (eg Japanese Trading Companies) to whom our competition regimes can not apply (because restraint on competition has its origin in culture, not in contractural agreements).

At present the tests and measures used to detect and remedy abuses of market power under Western competition principles seem entirely inadequate in relation to Australia's dealings in East Asia (eg the main criteria used is consumer welfare, whereas national security seems equally as important).

Consider the irrelevance of saying that: 'A firm in a dominant position is one with market power, the ability to raise prices significantly above costs without a corresponding loss of market share....' (OECD, Competition and Economic Development, 1991). The risk in dealing with communitarian economies has nothing to do with excess profitability, because power rather than profitability per se is the primary goal.

And how effective are national systems for promoting competition if (as has recently been alleged - see Fingleton, Blindside), Japan has now developed 'global natural monopolies'.

4. AUSTRALIA MAY NOT really BE IMPROVING ITS POSITION

PCiA noted the stimulus to improved performance from international competition, but no one seems to have enquired whether firms could find ways to cope with it (except in marginal economic areas which limit the community to relative low income levels).

For example, PCiA discussed countervailing power issues (re wheat / coal marketing) and highlighted conclusions that there was no evidence that being organised by government would help. But, while the previous Industry Assistance Commission (for example) showed the inadequacy of tradional forms of industry 'assistance', it did not show that its solution (a competive market) would be adequate, or that nothing else could be done.

Consider alternatives a typical approach by the then IAC (The Wheat Industry, 29/9/83 , No 329) in which:

· the IAC was only concerned with the 'efficiency with which the community's resources are used'. However efficiency is only one component in generating potential productivity gain (see Section 3(b)). The IAC did not consider what would be required for Australian enterprises to capture and exploit market power internationally (which would be a business-like approach).

· It was accepted that Australia was a price taker in wheat, rather than seeking ways to overcome this constraint. As a price taker the benefits from participation in any industry are very limited (eg the technical gains which make Australia an efficient producer benefit only purchasers, rather than Australia - because prices are bid down to production costs)

· IAC suggests the use of open tender arrangements for international sales, which provides no prospects that anyone could negotiate a better outcome through deployment of effective business strategies. The fact that publically accountable institutions (like the Wheat Board) probably could not do so effectively doesn't mean that no one could, or that such mechanisms would actually be able to emerge by itself in the face of well organised competition if the Wheat Board ceased to exist.

· the adopted definition of 'assistance' was very wide, but the assistance which was measured was very narrow, being confined to monetary support. This was inadequate given that it is now being said that the knowledge assets of companies (acquired from learning) are often more important than their physical assets, and that knowledge is the major form of assistance which has been effectively deployed in East Asia (see Section 3(a)). The latter is thus neither able to be measured, nor assessed.

· the IAC discussed 'selling' arrangements (ie getting rid of a product as a price taker), rather than marketing. The latter involves identifying market requirements, producing to suit this, and rapid responses to change.

· the market was discussed in terms of the quantity sold, not in terms of how the market is organised, which would be the essential starting point in devising methods to capture value added.

· the ability of the Wheat Board to acquire information about the market was discussed only in terms of information about the situation in Australia, without considering the information about international market conditions required to negotiate a higher price.

Furthermore PCiA notes concerns expressed about the ability of Australia's coal companies to negotiate satisfactory prices with unified (government orchestrated) purchasing groups. However the problem is not just fragmentation, but includes partial vertical integration of the industry by Japan acquiring an ownership role in mining operations, thus accessing information which can be used in building market power.

The Japanese investment strategy in Australia has been to build an ownership interest in the country but to avoid taking an equity interest in coal companies. The preferred means of entry has been to take a minority interest in joint venture developments rather than to sit on a share register. (Stevens M., 'Japan: Mining Partners as Well as Customers', Business Review Weekly, V3, n2, March 1993)

However the method used (based on gaining knowledge) is not one which the Trade Practices Act has means to address, because the system works on the basis of communitarian market relationships rather than those covered by contracts and law.

5. WHAT ECONOMISTS MAY NEED TO DO

The major limitation on economics' ability to solve Australia's economic problem, lies in a paradigm which sees causal relationships in an economy as fixed, and so emphasises abstract analysis, rather than action. There may be solutions to this.

Firstly, economists could develop evolutionary understandings of economies much faster than they are doing at present (eg see outline in Forster J. and Wild P., Economic Evolution and the Science of Synergistics, Department of Economics, University of Queensland, Discussion Paper #176, June 1995)).

Secondly, economists could make evolutionary economics into an applied art by involvement in regional and corporate business strategies. On this basis economists could identify conspicuous weaknesses in local business, and devise mechanisms whereby this could be changed (without having to 'pick winners'). Looking at the statistics which result from those weaknesses, merely enables comparisons to be made with others, but provides no one with any practical help. And as argued above, telling others that they need to compete just 'passes the buck' without any solution. For example, in considering Australia's commodities exports (and scope for value adding to them) it may be useful to stimulate applied, business-like, and non-governmental understanding about how international competitors operate, and about current business strategies.

Thirdly, economists could take account of knowledge (a product of learning) as a more economically important asset than capital resulting from investment.

Fourth, economists could develop a new framework for competition policy which:

· takes account of the different nature of the communitarian market economies; and

· develops evolutionary concepts (rather than static or dynamic structural concepts) of the requirements to deal with abuses of market power.

Finally is possible that there is a superior alternative to East Asia's methods, through explicit recognition of the importance of, and action to enhance, economic and social 'systems' (including the 'institutions' which Professor Ball discussed). For example, key East Asian philosophies and practices can be understood on the basis of system's concepts (see Craig J., Transforming the Tortoise: A Breakthrough to improve Australia's Place in the Economic Race?, 1993). Moreover it is possible that Western style techniques can understand what is involved much more efficiently (because: rational analysis is still of value, it being only necessary to recognise the cause of its limitations in complex situations; analytical methods still apply with great power to stable problems, it being only necessary to recognise that causal relationships can, and may have to, be altered; and analytical methods, though imperfect, are the only way to deal with some complex problems such as the environment). Methods to apply such understanding to the practical development of economies are also compatible with the philosophies of those foundational Western traditions (eg Christianity) which valued others above self. And ultimately (in an increasingly crowded and globalised world) Western ideals of development for universal benefit, are more likely to prove acceptable than development for exclusive racial and cultural groups.

John Craig

5/8/96

OUTLINE OF PROMOTING COMPETITION IN AUSTRALIA

Effective competition will usually improve the efficiency and dynamism of an economy.

Competition is promoted by policies to limit market power (so firms can not give less or take more without challenge). Competition is determined by number of producers, market shares, management attitudes, foreign competition and potential for new entrants. Competitve markets promote more efficient resource allocation, technical efficiency and dynamic efficiency (ie speed of response to opportunities and threats). Contestability has been seen as an alternative, but may seldom apply. Competition also prevents inequality of opportunity from exploiting monopoly positions.

Conflicting Objectives: Competition may need to be balanced against size needed for economies of scale and scope, given small economy. There are other conflicting economic and social objectives. All should be sought without weakening the competitive vigor of the market.

Size: There can be a conflict between competition and technical efficiency (because of need for firms to tap economies of scale and scope (involving combining production of several ierms with common inputs) - where if such economies are large, competition can be limiting). This has shaped trade practices law in Australia. Concentration is not a problem in Australia if market is contestable, or subject to international competition - the latter having been major stimulus to improved technical efficiency. Small business: Where scale is important, large businesses will have advantages. However this should not result in abuse of power. Innovation: Evidence does not strongly support argument that firms with large market share need to be tolerated because of being more innovative. Limited proection from patents etc is available. Prices: Competitive markets may have great price variability, which is one reason for price stabilisation schemes. Futures markets may also help. Countervailing Power: Producers may seek collective action to gain bargaining power when dealing with only few processors - but there may be ways to do this without imparing competitive price flexibility Terms of trade: Comptition amongst suppliers may reduce terms of trade. An ABARE study found too little evidence to show whether coordinated action against limited or unified foreign buyers woiuld be effective. The IAC found no evidence that Wheat Board obtained higher prices by restricting competition amongst Australian suppliers. Australia does not want price premia. Government accepts (for coal) that export controls require greater interaction with industry, market intelligence, effective consultation on price formation; and intense scruiny of settlements. Conservation: Restrictions on competition are needed for non-privately owned natural resources, to achieve both efficiency and conservation. Public Enterprises: Competition might reduce government's ability to pursue social objectives, though there are often more cost effective ways to achieve those ends. Investment: Does competition encourage short term profit oriented approach (cf Japan where financial structure and conventions prohibiting takeover encourage long term approach. Issue is whether capital markets ineffectively discount long term investment returns (say due to lack of information). Consumers: Intervantion may be needed where market does not provide consumers information; information is too technical; or health / safety issues are involved. Consumer protection does not need to create market power. Regulatory restrictions often benefit producers not consumers Compliance Costs: should be minimised Conclusion: achieve goals without undermining competitive forces.

Determinants: Competition is determined by market structure, and incidence of restrictive practices.

Market Structure: Concentration of ownership is significant. Though research in Australia has not shown this leading to inefficiency or high profits, this can happen at times. Concentration is relatively high in Australia, though tax changes have reduced incentive. Technological and managerial factors also reduce importance of scale economies. Increased competition may follow reduced border protection. However is not always as effective as domestic competition. Competition law does not deal with existing monopolies. Mergers can both reduce competition and increase productive efficiency, a trade off which needs to be assessed. An alternative to restrictingmergers is to restrain anti-competitive behaviour.

Restrictive Practices: Market power gives rise to monopoly profits which can not be prohibited, but abuse of that power to damage competitors can be. Collusive agreements can give rise to market power - which have been outlawed.

Self regulation: is an alternative to legislation, but requires care to avoid restricting entry - possibly by involving consumer representatives.

Professions: Anti-competitive practices outside corporations power is hard to restrict eg by professions - but this should be sought.

Industrial regulation: Many markets are regulated by governments (restricting entry). Some are now outdated. Efficiency gains in UK resulted from competition not from ownership changes. Regulation provides power to government trading enterprises, and these should be subject to TPA. Regulatory policies impeding interstate commerce are to be reviewed. legislation can not sensibly be subjected to competition test. Regulatory reforms have occurred, and should be facilitated by new procedures (where: legislation states objects; existing business regulation is reviewed re its usefullness; consider in terms of TPA major message; regulate to minimise competitive impact; advisory bodies should have consumer representation; and regulators should not become entrenched).

Price surveillance may be needed as supplement, but is second best option.