Competition Policies in Emerging Economies: Lessons and Challenges from Central America and Mexico

Macro-Financial Policy Making in Emerging Markets
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Thus, municipalities were asked first, their regulatory power having resulted from their ability to sell and auction concessions for water, electricity, mining, and other services. When municipalities appeared corrupt, extortive, or unable to deal with firms located in multiple areas, state regulation began with the creation of PUCs.

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The strong autonomy of U. Politicians have viewed potential disagreement with federal rules as a strong reason for not relinquishing the possibility to regulate utilities. Because of the large size of U. The Administrative Procedures Act authorized the commissions to make industrywide rules. Most state commissions still use quasijudiciary proceedings, with adjudicatory processes, rather than rule-making. This follows the example of the Interstate Commerce Commission, which established a regulatory model in the s that allowed for maintaining strong accountability of the regulators, even though they benefited from much discretion in the U.

Telecommunications: Competition and Regulatory History The late 19th and early 20th centuries were characterized by strong competition between local exchange operators, usually with at least two—one of which was Bell—in each city.

Since most companies did not interconnect, Bell used network effects to gain a competitive advantage over independent competitors and a larger consumer base. The DOJ challenged this behavior, and A. An aggressive policy of consolidation followed, which led to creation of the Communications Act. This Act remained in effect for 62 years, when it was replaced by the Telecommunications Act of The Communications Act established the Federal Communications Commission FCC , empowering it to approve new services, compel interconnection, suspend rates, and allocate frequencies.

It also obligated common carriers to provide service to the public.

8th International Economic Forum on Latin America and the Caribbean 2016 - Part II

Independence of the federal regulator. The Communications Act ensured independence of the federal regulatory agency through several provisions. First, the FCC was responsible to and its budget was decided by Congress, not the executive branch. Second, the five commissioners governing the FCC were nominated by the President and confirmed by the Senate. No more than three commissioners could represent the same political party, which constituted a balance-of-power mechanism and ensured insulation from political pressures. Third, to prevent capture by the industry, the commissioners were barred from having any financial interest in an industry related to the work of the FCC.

Regulatory problems. Regulation, therefore, consisted of a relatively simple rate of return. Other difficulties linked to the regulatory framework involved lack of clear allocation of authority between regulators. The regulatory costs associated with the design and implementation of these rules are likely to be significant and would prevent giving enough attention to other issues.

Unclear allocation of tasks between state and federal commissions.

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As stated in Section 1 of the Communications Act, the FCC was responsible for regulating prices and mergers and acquisitions; these were limited to interstate services, while intrastate services remained under control of state commissions, who frequently granted monopoly licenses to operators most of them were regional Bell operating companies. The Act modified this feature by allowing the FCC to intervene in the local exchange market.

However, the provision lacks clarity regarding the precise allocation of authority between the FCC and the state commissions, thereby giving rise to judicial uncertainty and potential disputes.

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Firms can use unclear allocation of authority opportunistically to delay implementation of regulatory rules or introduction of competition. The suit brought by incumbent local exchange carriers and state regulators against the FCC in illustrates this point. The FCC issued a first report and order, in which it prescribed the use of pricing based on total element, longrun incremental cost.

This was challenged on the grounds that local competition provisions should be designed and implemented by the states, not by the FCC. Finally, in January , the Supreme Court overturned this decision. This dispute has been costly, causing much delay in implementing the Act. Kerf and Geradin report that this case is thought to have discouraged entry into the local exchange market because of the perceived legal risks.

Under the Act, the FCC has to consult the DOJ before deciding whether to allow regional Bell operating companies to enter the long-distance market. Both can review. This system has both benefits and costs. The benefits stem from the possibility that the two agencies use different approaches, the DOJ focusing more on competition. The costs lie in duplicate expenses, delays in reaching a decision, and regulatory uncertainty. The overlapping of responsibilities risks inconsistency, particularly since the review process differs by agency.

Summary of Historical Findings Historical evidence shows that two main factors have affected the design of regulatory institutions: the technical characteristics of the industry and the political organization of the state. Effects of Technical Characteristics Regulation seems to have started at the local level, when municipalities first began to use their power of allocating licenses and concessions and of issuing price and safety regulations.

Whether regulation has been taken over by higher levels of government has depended on the structure of the industry.

Aligning Assets with Industry Characteristics

The Andean countries Bolivia, Colombia, Ecuador, Peru and Venezuela to differing degrees are plagued by severe problems of governance and with the challenge of integrating large numbers of historically excluded people, living in poverty or extreme poverty, and in many cases from indigenous or Afro-descendant backgrounds. Or a company may use its expertise in building efficient factories to establish operations elsewhere. Extenders can leverage their assets most effectively by seeking analogous markets—those similar to their home base in terms of consumer preferences, geographic proximity, distribution channels, or government regulations. Absent clear definitions and analytical procedures or the operational capacity to implement them, merger analysis could become progressively more difficult; in such circumstances the conferral of increased freedom on competition authorities and courts potentially raises the probability of decisions being made based on grounds not directly related to competition law. As for non-monetary penalties, all of the laws or proposed laws in this study contemplate the possibility that competition authorities may order that the prohibited activity be ceased or corrected, including the partial or total break up of a business that has been improperly merged. Under Turkish competition law, 99 as in the U. The Nicaraguan draft law contains a section on competition culture and refers to the simplification of filing procedures, reviews of judicial rulings and the treatment of government assistance.

When regulation had no economies of scale, municipalities retained power. Economies of scale arose with externalities in the operation of firms between neighboring areas, the need for regional coordination for railway design or interconnection of telecommunications and electricity networks , or when regulation required specific skills and expertise. Since regulation of local transportation and waste collection and treatment do not demand specific technical expertise, and because no externalities exist between municipalities, the local government has retained regulatory control over these industries.

Similarly, regulation of water, with the exception of environmental concerns, has remained at the local level. Since water consumption at the level of a given municipality has little effect on other localities, it seemed natural for the municipalities to retain the power they had initially over the industry. Karhl also relates how financial constraints have affected the behavior of municipalities in U.

Services on Demand

Though private investment achieved major projects during the 19th century, these were limited to ones that could use locally available water. When the need appeared to move water from one hydrolog-. By contrast, railway, telecommunications, and electricity industries operate on a much larger geographic scale, requiring specific expertise to understand their functioning. Duplicating specific skills at lower levels of government would clearly have been wasteful, and the public could easily perceive the economies of scale in having a centralized regulation. Therefore, in Europe, national regulation emerged.

Owing to their large size, U.

Lessons and Challenges from Central America and Mexico

Effects of Government and Political Structures A second factor that seems to have played a crucial role in the design of regulation in industrial countries is the general structure of the respective governments. Effective regulation needs both administrative bodies to execute it and political entities to ensure its legitimacy.

Regulatory structures have therefore been closely linked to the organization of the state. When regulatory needs arose in Europe and the United States, it was natural to first use the existing structure to deal quickly with problems. In general, regulation has first been undertaken by local political entities municipalities or regions that had the required legislative legitimacy.


The case of railways in France is an exception since an administrative body undertook to regulate the industry without any prior legislative mandate. However, this action reflects the informal authority of technocrats in the French state at that time. Once an entity began to regulate an industry, the regulatory structure was slow to change. This is because regulation entails the power to create and distribute rents, and political and administrative bodies are reluctant to relinquish such power.

Thus, removing authority from an existing structure has proven difficult. Nevertheless, it has been easier to do so when the public was aware of problems in the existing structures. Scandals linked to corruption, for example, have usually been followed by a change in the regulatory structure, either toward more centralized regulation, as in France, or less public intervention, as in the United States. Poor-quality service leading to widespread discontent has also helped to reform the regulatory structure. France, which has a centralized political system, quickly adopted national, centralized regulation, except for water and local.

The United Kingdom adopted centralized regulation, but with the participation of regional entities and monopolies with substantial power. This approach reflects the political autonomy of the regions and their will to assume sufficient regulatory power.

United States states retained many regulatory powers because of their autonomy and large size. Several observations can be drawn from the example of French railway design and management. First, cultural environment plays an important role in choosing regulatory structures. This contrasts with the United States, where belief in market mechanisms led to very different outcomes.

Second, expanding or reforming existing institutions is more common than creating new ones. The reason may be that economies were linked to avoid investing in a new structure or in existing institutions that strove to gain more power by obtaining broader mandates.

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Lessons and Challenges from Central America and Mexico Competition Policies in Emerging Economies features an in-depth analysis of two strategic. Do small developing economies, or SDEs, need a specific competition policy to create competitive Lessons and Challenges from Central America and Mexico.