Competition Policy and Economic Development Dr. Ir. Benny Pasaribu, M.Ec Commissioner, KPPU, INDONESIA Komisi Pengawas Persaingan Usaha 1.

Competition Policy and Economic Development

Dr. Ir. Benny Pasaribu, M.Ec

Commissioner, KPPU, INDONESIA

Komisi Pengawas Persaingan Usaha

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Outline of presentation The presentation tries to show a preliminary study focusing on

the impact of fair competition on economic development. The study is conducted by the University of Gadjahmada, Jogyakarta, in 2010, in cooperation with KPPU-RI. This presentation shows that the improvement in fair business competition will have a positive impact on the performance of the relevant industries, hence the economic development, ceteris paribus. However this study needs to be followed by a more comprehensive research with the improvement on the economic modeling and collection of primary and secondary data and information.

The presentation consists of: Current development of competition law in Indonesia; The impact of fair competition on economic development; Conclusion.

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RECENT DEVELOPMENT COMPETITION LAW IN INDONESIA

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Objectives of the Law (article 3)

To safeguard the interests of the public and to improve national economic efficiency as one of the efforts to improve people’s welfare;

To create conducive business environment through the stipulation of fair competition in order to ensure the certainty of equal business opportunities for large-, medium-as well as small-scale businesses;

To prevent monopolistic practices and or unfair business competition that may be committed by business actors;

To create effectiveness and efficiency in business activites.

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THE LAW prohibits: Agreements; Business activities; and Dominant Position, that may potentially cause

the occurrence of monopolistic practices and unfair business competition;

These may include prohibitions of cartel, price discrimination, abuse of dominant position, and merger and acquisition, that may potentially cause the occurrence of monopolistic practices and unfair business competition.

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Principles of The Law no.5/1999

Business activities in Indonesia must be based on economic democracy, with due observance of the equilibrium between the interests of business actors and the interests of the public;

Guarantee fair price of goods and services with adequate quality and supply, and qualified services.

Promoting innovation, efficiency, and productivity.

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KPPU-RI

KPPU is an Independent Commission established according to Law no. 5/1999;

KPPU as the Competition Authority supervises the implementation of the Law;

KPPU has a number of authorities, including to impose sanctions, though administrative sanctions, against business actors violating the law.

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CURRENT DEVELOPMENT

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Development of Indonesian competition law

Fair Competition for Welfare of the Society

There is positive trends of increased number of reports from public;

The implication will be: an increase of public awareness.

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A. Reports Received

Reports

Development of Indonesian competition law (2)

Fair Competition for Welfare of the Society

Number of case initiative is increased compare to average number on the first five years.

The increased case initiative is one of KPPU’s efforts to conduct enforcement activity on anti competitive behaviors that harms consumers.

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B. Initiative Cases

Cases

Development of Indonesian competition law (3)

Fair Competition for Welfare of the Society

Between 2000-2010, KPPU issued 245 outputs;

51 statements on behavioral changes and the in-existence of unfair business competition;

KPPU issued 190 decisions on competition violation;

Some of which are abuse of dominant position by Carefour, SMS cartel, cooking oil cartel, fuel surcharge, and cartel in pharmaceutical;

KPPU also issued three policy recommendations, related to specific cases.

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190

3 5

Penetapan Putusan

Saran Berjalan

C. Decisions

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Process

DecisionStatement

Recommendation

Development of Indonesian competition law (4)

Fair Competition for Welfare of the Society

There are 78 objected decisions;

In district court level, 34 decision is affirmed (43.6%), while 29 decision (37%) is annulled by the court.

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Menang PN

Kalah PN

Proses

D. Objection in District Court

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Annulled

Affirmed

Process

Development of Indonesian competition law (5)

Fair Competition for Welfare of the Society

There are 59 decision applied for cassation to the Supreme Court;

31 decisions is affirmed (53%), while 12 decision (20%) is annulled. Currently there are 16 decisions under cassation process.

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12

16

Menang di MA

Kalah di MA

Proses

E. Cassation (Supreme Court)

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Process

Annulled

Affirmed

Development of Indonesian competition law (6)

Fair Competition for Welfare of the Society

As part of advocacy, KPPU issued policy advice to the government with increasing trend, especially since 2006;

Some advices dealt with policy in several sectors, namely energy and natural resources, transportation, telecommunication, retail, cooking oil, fuel surcharge, and agro-industry.

More than 50% of advices gained positive response by the government through policy adaptation.

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F. Policy Recommendations

Recommendations

THE IMPACT OF COMPETITIONON ECONOMIC DEVELOPMENT

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Conceptual Background (1)Pri

ce

Pm

Pc

Qm Qc Quantity

D

MR

S

DWL

Note:D = DemandS = SupplyPc = Price CompetitivePm = Price MonopolyQc = Quantity CompetitiveQm = Quantity MonopolyDWL = Deadweight Loss

16 Fair Competition for Welfare of the Society

Conceptual background (2)

A study by Marcin Przybla and Moreno Roma in 2005 found negative correlation between competition and inflation. Similar finding also identified by Jonsson in 2007;

A study by Griffith, Harrison and Mc Cartney in 2006 found negative correlation between competition and unemployment in an optimal labor market institution.

A study by Dutz and Hayry in 1990 indicated correlation between law enforcement and competition policy with long-term economic growth.

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Conceptual background (3)

Fair competitio

n

Normal Price

Increased Quantity and

Quality of goods and services

INCREASED WELFARE OF THE SOCIETY

Lower inflation

Poverty reduction

Increased competitiveness

Reduce unemployment

Economic growth

Better services

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Conceptual background (4)

Fair Competition for Welfare of the Society

The basic concept of the research is to follow classic SCP (Bain, 1957), where market structure will affect behavior and thus will affect performance in a simultaneous way.

Last theoretical development showed interactive SCP pattern where variable SCP will affect one another.

In a fair competition condition, market structure will not be concentrated, which affect to the innovative and competitive behavior leading to more efficient performance. This will create positive multiplier effect on other economic parameter, such economic growth, employment, and inflation.

Structure

Behavior

Performance

Concentration;Company size,;Entry and exit condition,;Product differentiation,;Vertical integration;

Pricing strategy Production strategy Marketing strategy,R&D

Profitability; Efficiency; Product quality; Technical improvement; Welfare;Employment;

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Model Joint research by KPPU and the University of Gadjah Mada

(2010), several approaches and quantitative analysis is used to estimate competition impact on economic growth, inflation, and unemployment. This research used data from KPPU decisions and researches from 2000-2009 and from Statistical Bureau.

Variables used: GDP (PDRB), GDP per Capita (PDR/PDD), GDP deflator, unemployment

(UNP), and competition index (CI)

ijtijt

ijtijtijt

ijtijtijt

ijtijtijt

CIUNP

vCIRBdeflatorPD

eCIPDD

PDRB

uCIPDRB

lnln

lnln

lnln

.lnln

10

10

10

10

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Independent variable: Competition Index (CI) Competition index of an industry can show balanced condition

of resources allocation and SCP’s interaction in national and local areas.

CI is not merely reflecting the structure, but also behavior and performance of an industry (Interactive SCP)

Competition index of an Industri (“i”) in a region/city (CIirt) is calculated using this equation (Glaeser et al., 1992: 1138; Mody & Wang, 1997: 301-2; Kuncoro, 2001: chapter 5):

)/()/(

outputfirmoutputfirm

CIiINDO

irirt

SP

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Industries observed: Milk industry Cooking palm oil industry Flour industry Sugar industry Single artificial fertilizer industry Mixed artificial fertilizer industry Pharmaceutical industry Tire rubber industry Cement industry Automotive industry

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Data This study used secondary data as follows:

Large and medium industry statistic from Indonesian Bureau of Statistics. The survey provided data on manufacture’s level of large and medium scale manufacturer with more than 20 labor forces, which can be classified according to their industry and local codes, that consist of 20,000 companies, 27-33 provinces, and 300-400 regions from 1998 to 2007.

Economic Census 2006, especially for large and medium industry.

National Social and Economic Survey 1998-2007, especially for welfare’s indicators.

Macro-economic performance indicators, especially inflation (consumer price index and large trading price index), economic growth, and job opportunity.

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THE RESULTS OF THE STUDY

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Table 1. Competition Impact on GDP Growth

Regions

Industri

Cooking Oil Milk Wheat

Flour SugarSingle

Artificial Fertilizer

Mixed Artificial Fertilizer

Pharmaceutical Tire rubber Cement Otomotives

NAD 0,108       -0,076       0,095  SUMUT 0,899     1,085 -0,101 0,012 0,127 -0,149 -0,543  SUMBAR 0,160           -0,060 -0,161 -0,109  RIAU -0,291         -0,021        JAMBI -0,029                  SUMSEL -0,103     -0,060 0,280 0,019 -0,019   0,023  

BENGKULU 0,111                  

LAMPUNG 0,127     -0,013         -0,013  DKI -0,112 -0,511 0,343       0,014 0,097   -0,212JABAR 0,019 -0,150 -0,056 0,266 0,031 -0,048 0,303 0,354 0,059 0,057JATENG 0,273 -0,049 0,109 0,019 0,055 -0,062 -0,058 0,047 -0,038 0,174DIY   0,054   -0,104 0,037   -0,110      JATIM 0,077 0,064 -0,216 -0,209 0,014 0,136 -0,133 -0,079 -0,508 0,013BALI             0,010      NTT                 0,129  KALBAR 0,122         -0,095        KALTENG                    KALSEL       0,229 -0,545          KALTIM -0,155       -0,115          SULUT -0,115     -0,199            SULTENG 0,263               -0,354  

Positive elasticity indicates increase number of company (or competition) will increase output of other industries, vice versa.

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Table 2. Competition Impact on GDP per Capita

Positive elasticity shows increased competition that causing the increase of GDP per Capita, vice versa.

Regions

Industri

Cooking Oil Milk Wheat

Flour SugarSingle

Artificial Fertilizer

Mixed Artificial Fertilizer

PharmaceuticalTire

rubber Cement Otomotives

NAD 0,127       -0,063       0,114  SUMUT 0,870     1,031 -0,096 0,010 0,107 -0,147 -0,513  SUMBAR 0,135           -0,047 -0,122 -0,074  RIAU -0,233         -0,013        JAMBI -0,037                  SUMSEL -0,089     0,002 0,367 0,015 0,003   0,047  

BENGKULU 0,086                  

LAMPUNG 0,110     0,035         0,035  DKI -0,068 -0,515 0,213       0,070 0,093   -0,118JABAR 0,034 -0,192 0,015 0,263 0,030 -0,050 0,340 0,462 0,051 0,036JATENG 0,368 -0,042 0,162 0,009 0,065 -0,070 -0,049 0,047 -0,053 0,251DIY   0,035   -0,081 0,019   -0,072      JATIM 0,066 0,051 -0,183 -0,186 0,013 0,116 -0,104 -0,066 -0,430 0,011BALI             0,005      NTT                 0,071  KALBAR 0,104         -0,058        KALTENG                    KALSEL       0,252 -0,355          KALTIM -0,115       -0,061          SULUT -0,090     -0,406            SULTENG 0,174               -0,275  

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Table 3. Competition Impact on unemployment

Regions

Industri

Cooking Oil Milk Wheat

Flour SugarSingle

Artificial Fertilizer

Mixed Artificial Fertilizer

PharmaceuticalTire

rubber Cement Otomotives

NAD 0,407       0,219       0,299  SUMUT 0,355     0,420 0,008 -0,017 0,392 0,021 -0,245  SUMBAR 0,273           0,031 0,090 0,267  RIAU -0,440         -0,050        JAMBI -0,216                  SUMSEL -0,217     0,819 1,151 -0,072 -0,211   0,238  

BENGKULU 0,763                  

LAMPUNG 0,188     0,561         0,561  DKI 0,194 -0,008 -0,514       -0,098 -0,002   0,087 JABAR 0,162 -0,285 3,016 0,423 0,044 -0,072 0,410 0,694 0,069 0,023 JATENG 0,514 0,018 0,268 -0,002 0,131 -0,069 -0,536 0,025 -0,109 0,484 DIY   0,148   -0,086 0,146   -0,428      JATIM 0,071 0,586 -0,346 0,175 -0,068 0,196 -0,683 -0,237 -1,079 0,046 BALI             0,027      NTT                 0,324  KALBAR 0,588                  

KALTENG                    KALSEL         -0,996          KALTIM -0,306       -0,226          SULUT -0,670     -0,384            SULTENG                 0,921  

Positive elasticity shows increased competition that will raise unemployment, vice versa.

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Table 4. Competition Impact on Prices

Regions

Industri

Cooking Oil Milk Wheat

Flour SugarSingle

Artificial Fertilizer

Mixed Artificial Fertilizer

Pharmaceutical Tire rubber Cement Otomotives

NAD 0,857       -0,167       0,680  

SUMUT 0,356     0,566 -0,042 0,011 0,140 -0,035 -0,312  

SUMBAR 0,326           -0,122 -0,238 -0,129  

RIAU -0,568         -0,038        

JAMBI -0,090                  

SUMSEL -0,160     -0,064 0,455 0,025 -0,043   0,043  

BENGKULU 0,326                  

LAMPUNG 0,202     -0,030         -0,030  

DKI -0,089 -0,895 0,215       0,191 0,164   -0,080

JABAR 0,070 -0,377 -0,034 0,557 0,067 -0,089 0,673 0,850 0,123 0,088

JATENG 0,810 -0,104 0,365 -0,027 0,146 -0,148 -0,089 0,103 -0,160 0,579

DIY   0,115   -0,170 0,089   -0,182      

JATIM 0,168 0,457 -0,562 -0,068 -0,017 0,326 -0,656 -0,245 -1,040 0,040

BALI             0,024      

NTT                 0,318  

KALBAR 0,310         -0,329        

KALTENG                    

KALSEL       0,660 -0,639          

KALTIM -0,182       -0,113          

SULUT -0,235     -2,110            

SULTENG 0,893               -0,201  

Positive elasticity indicates increased competition that lead to inflation or increasing cost industry, vice versa.28

Summary of estimation result Table 1: for most of Java, increasing competition in cooking oil, single

fertilizer, and outer-inner tire as well as automotive industries, created positive effect on GDP growth. For out of Java Provinces, increasing competition created negative effects, especially in cement, tire rubber, and single fertilizer industries.

Table 2: for most of Java and Sumatera, increasing competition created positive effect on GDP per Capita, especially in cooking oil, sugar, single fertilizer, and automotive industries. For others, increasing competition created negative effect, especially in cooking oil, mixed fertilizer, pharmacy, tire rubber, and cement industries .

Table 3: in most regions, increasing competition can reduce unemployment, especially in mixed fertilizer, pharmacy, cooking oil, and flour industries. For automotive in Java, increasing competition will lead to increase number of unemployment.

Table 4: for inflation sensitive products (cooking oil, sugar, flour, milk, and cement), increasing competition will reduce inflation. For mixed fertilizer and automotive industries in most of regions studied, increasing competition tends to lead to inflation or price increase.

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KPPU Research: simulation of income savings due to price cuts Income savings made by consumers from 4

products due to price reductions after KPPU’s decisions:

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Commodity Price Decrease Income Savings (in total IDR)

Min Max

Sugar (2009) 4% 851.760.000.000 2.298.400.000.000

Flour (2009-2010) 1% 20.280.000.000 253.500.000.000

Bulk cooking oil (2009) 16% 3.075.800.000.000 9.599.200.000.000

Packaged cooking oil (2009) 4% 767.260.000.000 2.092.220.000.000

Income saving for consumer from SMS Using similar methodology,

KPPU’s research shows that after the decision on SMS cartel, consumer’s income saving is estimated to increase by +/- IDR 20 trillion/year.

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CONCLUSIONS

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Conclusions

Fair Competition is part of the implementation of Indonesian Constitution, hence a vital and strategic instrument in Indonesian economy;

The study shows more intense and healthy competition, will lead to positive impact on industry performance, inflation, unemployment, and economic growth;

Income savings from SMS, cooking oil, sugar, and so forth, are part of the people’s welfare improvement. Income savings are made possible when there is a price reductions of monopolistic practices by business actors after the KPPU’s decisions. The decisions of KPPU can be made according to the verdicts of the KPPU’s court and/or prevention and/or recommendation to relevant institutions;

As preliminary study, the findings may be valuable. However, I must aknowledge that the study may contain several weaknesses, especially on the limitation of the economic models and available data/information. More empirical and comprehensive research is necessary. Applying Computable General Equilibrium (CGE) model will provide highly useful findings, hence very much recommended.

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References

Dutz, M. A and Hayri, A. 1990. Does more intense competition lead to higher growth? World Bank Research Project.

Griffith, R., Harrison, R and Cartney, G.M. 2006. Product Market Reform, Labor Market Institutions And Unemployment. Working paper: The Institute for Fiscal Studies.

Jonson, M. 2007. Increased Competition And Inflation. Economics Review, 2nd Edition.

Kuncoro, dkk. 2010. Kajian Peranan Persaingan Usaha Dalam perspektif Kesejahteraan Konsumen, Inflasi Dan Pertumbuhan Ekonomi. KPPU dan Pusat Studi Asia Pasifik UGM.

Lipczynski, J. and Wilson, J. 2001. Industrial Organization: An Analysis of Competitive Markets. Prentice Hall: Singapore.

Pasaribu, Benny P. 1995. “Industrial and Trade Policies: A Multy Sectoral Model with Increasing Returns to Scale and Imperfect Competition”. PHD Thesis, University of Ottawa.

Pryzibla, M. and Roma, M. 2005. Does Product Market Competition Reduce Inflation? Evidence From EU Countries And Sectors. Working paper: European Central bank Ed 453.

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