Competition policy and the poor

Some 21 years ago, upon assuming leadership of the country, President Fidel V. Ramos and his government lost no time to diffuse monopolies and cartels in key sectors of the economy such as telecommunications, domestic aviation and shipping. Fostering greater competition and competitiveness in the country’s productive sectors was central to his Medium Term Philippine Development Plan for 1992-98 and his then battle cry for “Philippines 2000.” Much of the Ramos economic policy reforms—effected through over a hundred economic reform laws passed within his presidency, along with countless executive and administrative orders—were in pursuit of this strategy of fostering greater competition.

What’s wrong with lack or absence of competition? Without adequate competition or market contestability (i.e., possibility of entry by potential competitors), the producer or supplier can enjoy undue market power. He can limit quantities supplied and set prices higher than would otherwise prevail under a competitive market, allowing him to enjoy excessive profits at the consumers’ expense. He could thus maximize his profits as consumers are left with lower supplies, higher prices and limited choices, all leading to reduced welfare.

For more than a decade now, there have been attempts to push legislation for a competition policy law that would effectively unify various past reforms that addressed undue market concentration and promoted greater competition. Such law would expand the reforms into sectors of the economy still in need of greater competition, and establish an institutional mechanism for enforcing competition policy. It would also address anticompetitive and unfair trade practices that give existing dominant players undue advantage over new or smaller competitors. Given the current strong clamor for inclusive growth, of particular concern to me are practices that work against the poor, especially those in the rural areas.

I remember a story once shared with me by the late Dean Dioscoro L. Umali of UP Los Baños, who eventually headed the UN Food and Agriculture Organization in Asia-Pacific in the 1970s. He told me of how he had personally tried to help a farming community in the hills of Dolores, Quezon, by donating to them a Toyota Tamaraw utility vehicle. He wanted the farmers to be able to bring their vegetable produce directly to Divisoria and fetch better prices for them. He had been struck at how traders were taking advantage of these farmers by offering them prices far too low compared to what they were selling for in the public markets.

When the farmers brought their first Tamaraw-load of vegetables to Divisoria keen with anticipation, they found out to their dismay that they could not even park their vehicle without being harassed by traffic policemen. There was no place in the market they could occupy to be able to sell their produce. To make a long story short, they discovered that the only way they could do business in Divisoria was to deal with the trading cartel that controlled the produce wholesale market.

The story graphically illustrates what may very well be the most pervasive form of failure of competition, to which could be traced much of rural poverty in our country. Lack or absence of competition in primary agricultural markets due to monopsony (single buyer) and oligopsony (few buyers) situations in the farm trading sector has deprived our small farmers of a more rightful share of the final price that their products actually fetch in the markets.

At the farm level, these monopsonies have been perpetuated over the years by the interlinking of the markets for credit, farm inputs and

primary farm products. That is, farmers who have previously been lent money by an agricultural trader, who may have also supplied their farm inputs like seeds and fertilizers, are obliged to sell their harvest to that same creditor. Predictably, the prices they pay the farmer for his harvest would be significantly lower than what he could have obtained elsewhere, if given the choice on who and where to sell to. At the wholesale level, these same monopsonies and cartels are perpetuated by unholy alliances with government officials and law enforcers, with whose cooperation and protection the exclusionary tactics described above are made possible.

The situation has been so pervasive in the small farm sector in the Philippines for decades, and yet we remain unable to get our small farmers out of this predicament. Discussions on competition policy tend to focus too much on the industrial and commercial sectors. And yet this failure of competition in the rural economy deserves equal if not even greater attention, being a primary reason why small Filipino farmers remain among the poorest members of our society. The plight of much of our rural poor could be significantly improved if the agricultural marketing system were subject to more competition than it is today. Many solutions had been offered in the past, including strengthening of farm cooperatives and the entire farm cooperative system (South Korea’s success in this is worth emulating), establishing new wholesale markets other than Divisoria, and so on. Past failures with such initiatives may simply reflect lack of political will, poor program design, poor management and implementation failures, rather than inherent flaws in the solutions themselves.

What’s clear to me is that competition policy, especially if it addresses market failures in the rural economy, would have far reaching benefits that would translate into the inclusive economic growth that has eluded us for far too long.

* * *

E-mail: cielito.habito@gmail.com