FAC ESSAY
Volume 18 Number 1
The Parasites Who Leech Billions From the Poor
01 February 2005

Phil Evans exposes the scandal of international price cartels.

International price cartels cost developing countries at least $10-24 billion per year. That’s more than the Gross Domestic Product of Tanzania in 2002.

International price cartels are global conspiracies of companies to rig markets and keep prices high. They are most common in what are called ‘intermediate markets’— which trade products that countries need to develop their industries. One of the working definitions of globalization is increased trade in these sorts of goods—because this indicates that industry is growing and trading.

Take graphite electrodes, for instance, which are a key input to steel mini-mills. Or citric acid, which is a significant industrial food additive; lysine, which is added to agriculture feed; seamless steel pipes, needed for oil production; or vitamins. If a developing country is going to develop an indigenous steel, food, oil or agricultural industry it will need these goods. They have all been the subject of infamous cartels in recent years.

Cartels are by their nature secret. We only know about 16 of them: there are certainly more out there. But even those we know about are estimated to have affected $81.1 billion worth of the trade of developing countries. This amounts to almost seven per cent of all imports received by developing countries, roughly 1.2 per cent of their GDP. It is difficult to be exact about the actual effect of cartels, but price rises of 20-30 per cent were normal. This means that annual overcharges to developing countries ran to $10-24 billion.

HUGE COST
Of course this cost is imposed on indigenous producers—and then passed on to other firms in that country and eventually to consumers. For example, if a steel manufacturer in Brazil pays 20 per cent extra for graphite electrodes, the price of its steel will rise. This price increase will be passed on to the domestic car and construction industries, and will feed into higher car and house prices for consumers, industry and government. A cartel is not a one-off leech on an individual firm; it is a long-lasting parasite on an entire economy.

By any standards, this is a huge cost. The IMF estimated that if 50 per cent of the agricultural tariffs and subsidies in the developed world were dropped, developing countries would gain $8 billion a year. This is at least $2 billion less than would be gained from tackling cartels.

Last July’s Geneva Declaration, which put the World Trade Organization (WTO) talks back on track, included an agreement to slash agricultural subsidies in the developed world. But it did so by omitting competition policy, a vital factor in combating both domestic monopolies and international price cartels.

In this age of re-branding, competition policy is in need of a name change. Names do matter; there is an apocryphal story that when the word competition was translated into Japanese at the dawn of the 20th century it became ‘fighting with each other to succeed’. Japan’s ruling elite of the time could not make sense of this: they argued that success would only come though cooperation.

Competition has three major tasks; to immunize consumers from abuse, to curb attempts to gain unfair control of the market and to ensure that any benefits from trade or commerce are passed on down the line to consumers. Competition policy is like the white blood cells of an economy—it identifies an anticompetitive infection, isolates it and removes it. And it makes sure that it does not return.

REVOLT OF THE WEAK
If a country opens up its markets without having the white blood cells of competition policy to stop monopolistic infection, this will result in high prices, exclusion of local firms and abuse of consumers.

History offers us some useful lessons. In many parts of the world competition policy is called ‘antitrust’ or ‘anti-monopoly’ policy. The oldest competition policy regimes were based on a rural revolt against the huge industrial conglomerates of the late 19th and early 20th centuries. Competition policy was a revolt of the weak against the strong; of the isolated poor against the concentrated rich.

Competition policy is thus a progressive pro-poor policy designed to stop economies being monopolized by huge firms. It is also one of the key tools in fighting corruption. The enormous problem of bid-rigging, where contractors conspire to rip off tax-payers, is a huge drain on resources in very many countries. While this problem occurs everywhere, and some of the most famous cases come from Europe and developed Asia, it is most damaging in poorer countries with limited government budgets.

At its best, competition policy ensures that firms battle each other for the money of consumers (in markets) or taxpayers (in government contracts). When trade negotiations lower trade barriers the cost of goods for importers falls. If the importer is a monopolist then that saving will most likely be pocketed by him; if there is competition then the consumers are most likely to benefit.

URGENT
Competition policy at the national level is a pro-poor, pro-consumer policy. It can immunize economies from the ills of domestic monopolies and protect consumers and taxpayers from being ripped off. But, if we are to tackle monopolies and price cartels in an increasingly globalized world, we will have to act globally. Only through joint action can we destroy the parasites that leech billions from the coffers of developing countries every year through cartels.

Cartels are the most flagrant example of abuse in the field of competition. But we must also look at the way firms from developed economies control the supply chain and at cross-border abuse of market power. These are not the fantasies of economics nerds—ask any developing world producer who negotiates with a Western supermarket group.

There is an urgent need for the WTO to reconstitute its working group on competition policy and focus on rooting out the abuses of the market that damage developing countries the most. The gains from such actions would be greater even than those resulting from agricultural negotiations. Surely we cannot let that pass us by.

Dr Phil Evans is the Principal Policy Advisor of Which?, the UK’s consumers’ association.


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