PROPOGATING COMPETITION POLICY IN MALAYSIA:
A ROUGH TERRAIN TO REALIZATION
Anuar Ariffin, Ph. D 1
Introduction
Competition policy, an instrument used to address market failures and to curb the market
power of businesses, has only been introduced in Malaysia very recently. Although the idea
to have a law aimed at encouraging competition in all sectors of the economy was first
floated in the middle of 1990s, its realization takes longer time than it should have been due
various factors. This paper examines the process and circumstances facing Malaysia in
coming up with a competition policy.
The Virtue of a Competition Policy: A Debate
In Malaysia two perennial questions exist when someone talks about a competition
policy. Does Malaysia really need a competition policy? Is a competition policy really
beneficial to our businesses and economy? Two different groups give opposing views on
these questions. The first group, a more dominant and at the forefront in championing the
thinking of mercantilist-nationalists, argues that a competition policy brings more harm than
good. This group claims that being a small open economy Malaysia needs an environment of
a closed relationship not only between the government and businesses but also among
businesses themselves.
The existence of this environment would bring various benefits, initially to businesses
and later to the economy as a whole. When businesses act together cooperatively they can
strengthen themselves not only from the perspective that they are able to face challenges of
turbulence economic environment but also by reining in cut-throat competition. Under a
cooperative environment businesses would be able enjoy greater profits. Overtime, profit
accumulation allows businesses to grow bigger in terms of size, capital and turnover. In the
end the economy at large will benefit. Also, the existence of cooperative environment allows
businesses to share various resources in trying to expand their present in overseas markets
through increasing exports of domestic operations and exploring opportunities for potential
investments. On the other hand, competition between businesses will make everybody worse1
Dr. Anuar Ariffin is currently the Head of Program, Economics and Business Management, Malaysian Institute
of Public Administration, Malaysia.
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off. Normal competition will at the very least push down profits of individual companies; cutthroat competition will force some companies to go under.
Meanwhile, arguing from a different perspective, a second group – mainly economists
and public officials from the Ministry of Domestic Trade and Consumer Affairs – claims that
competition among businesses is not only beneficial but necessary. The benefits of
competition to an economy can be viewed from various angles. First, competition will force
businesses to continuously improve their products and productivity. For some businesses this
is important in order to be ahead of their competitors. For others this may be necessary just to
remain in business. Second, competition will force companies to innovate or even invent
new system and technology. By doing this businesses can continuously produce better
products at cheaper prices. Third, competition among businesses will generate enormous
benefits to the people and the economy at large. These benefits not only come in the form of
customers being able to enjoy more variety of goods and services but they are available at
cheaper prices. To that end, each individual would be able to increase their utility by
consuming more goods (and services) with the same amount of money.
The thinking of mercantilist-nationalists is very dominant in Malaysia. The arguments
of this group have always got the friendly ears of politicians and policy makers. Meanwhile,
the thinking and arguments of the other group are seldom being bought, neither by the elite
group of politicians and policy makers nor by a vast majority of ordinary people.
Misconception and Misunderstanding about Competition Policy
In Malaysia a majority of policy makers and political leadership view competition
policy with suspicion since it has a direct impact not only on businesses but also on how
policies, rules and regulations about behaviours of businesses are designed. In many
circumstances monopolists and oligopolies are created by specific government policies. This
is so because it is a dominant thinking among them that Government should have a big say
and influence over country’s business and economic activities. As a result many economic
sectors are highly policy-driven, to the extent that the number of players, outputs and pricing
are determined by the Government. Not a long time ago, the number of sectors, identified as
policy-drive, is huge. Of late however, the Government has pursued liberalization with
greater vigour resulting in reduced number of policy-driven sectors and forces of markets are
allowed to rule.
Still sectors such as electricity (both generation and distribution),
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telecommunications, iron and steel, automotive, as well as stapled food including rice, flour,
sugar and cooking oil continued to be under heavy regulations.
Initial Conception and Initiatives to Introduce Competition Policy in Malaysia
The initial idea, in which Malaysia should have a specific and well documented
competition policy, primarily emerged during the negotiations of the GATT’s Uruguay
Round (UR). Discussions during the UR negotiations concern more with specific cases where
domestic anti-competitive practices restrict trade between contracting parties.
The WTO
Agreements, signed by member states in 1994 following the conclusion of the UR
negotiations, have implicitly embedded competition policy concerns in several provisions of
the agreements. These include in the original General Agreement on Tariff and Trade
(GATT) articles such as Article II, III, XI and some General Agreement on Trade in Services
(GATS) articles and Trade Related Aspects of Intellectual Property Right (TRIPS).
Discussions and work programs concerning relationship between competition policy and its
impact on trade continued under the auspicious of the WTO. A formal and more structured
effort within the WTO began when members agreed to launch the Working Group on the
Interaction between Trade and Competition Policy (WGTCP) at the WTO Ministerial
Conference in Singapore in 1996. Again at the 2001 WTO Ministerial Conference in Doha,
Qatar, members put the competition question on the agenda, and defined a focus of future
work for the WGTCP in paragraph 25 of the Doha Ministerial Declaration.
“In the period until the Fifth Session, further work in the Working Group on the
Interaction between Trade and Competition Policy will focus on the clarification of:
core principles, including transparency, non-discrimination and procedural fairness;
provisions on hardcore cartels; modalities for voluntary cooperation; and support for
progressive reinforcement of competition institutions in developing countries through
capacity building. Full account shall be taken of the needs of developing and leastdeveloped country participants and appropriate flexibility provided to address them”.2
Lights at the End of the Tunnel
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At the subsequent WTO meetings, however, members failed to reach a consensus on the content of possible
rules, mostly due to the objections of developing countries. Consequently as the September 2003 Cancun
Ministerial Conference ended in deadlock, the General Council of the WTO dropped competition policy from
the Doha agenda in 2004.
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The subject of competition policy came to the forefront of policy debate and
discussions in Malaysia only at the end of 1900s thanks to a small group of policy makers
and economists who continued to propagate the imperative of having it and tried to push this
issue into the national agenda. Efforts and initiatives to push the discussion on the need to
have a competition policy to the forefront continued to gain strength toward the middle of
2000s. The Ministry of Domestic Trade and Consumer Affairs continued to engage other
ministries and government agencies which have a clout over policies of specific economic
sectors and industries. These include Ministry of International Trade and Industry, Ministry
of Primary Industry, Ministry of Agriculture, Ministry of Finance as well as central agencies
involved in economic planning. At the same time consultations were also held with trade and
industry associations and captains of businesses. The consultations were done with two
objectives in mind: educating relevant parties on the imperative of having a competition
policy and on the best approach that Malaysia should take to introduce one.
The engagement and consultations are unavoidably time-consuming as many policy
makers, captains of industries and organizations representing businesses are sceptical about
the virtue of having a competition policy.
These sceptics are not only a reflection of
misunderstanding and misconception about the policy but also a representation of an effort by
beneficiaries of the prevailing policies to protect their business interests from greater
competition.
Only towards the end of 2000s, after more than a decade of struggles and
perseverance, that a competition policy was table to the Malaysian Cabinet for a decision.
Finally, after the Cabinet had agreed a bill on competition policy was sent and subsequently
approved by the Parliament in 2010 under the name of Malaysian Competition Act 2011.
The Components of Malaysia’s Competition Act
Malaysia’s Competition Act is enacted with the purposes to encourage economic
efficiency, innovation and entrepreneurship.
The Act prohibits horizontal and vertical
arrangements between enterprises. With this provision businesses are prohibited to have an
agreement between them with the intention to (1) fix a purchase or selling prices (directly or
indirectly) (2) share market or sources of supply (3) limit or control production, market
outlets, market access, technical or technological development (4) bid rigging and (5) having
the object of significantly preventing, restricting or disturbing competition in any markets for
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goods or services. In addition, the Act also prohibits enterprises from engaging in any
conduct which amounts to an abuse of a dominant position in any market for good or
services. Among the conducts which can be deemed as abusing a dominant power include
(1) imposing unfair purchase or selling price or other unfair trading condition on any supplier
or customer (2) refusing to supply to a particular enterprise (3) applying different conditions
to equivalent transactions with other trading partners (4) imposing unfair condition in any
contract (5) resorting to predatory behaviour towards competitors (6) buying up a scare
supply of intermediate goods or services required by a competitor.
The Act also entrusts the Malaysia’s Competition Commission (MyCC) with powers
necessary to implement the law. One of the powers provided is for MyCC to investigate
cases suspected to infringe any provisions of the law, either based on a complaint by other
parties or an initiative undertaken by the Commission itself.
Others include a power
requiring suspects to provide relevant information, access to records, access to computerised
data as well as a power to search and seizure. Although the commission is empowered to
start an investigation but the power to prosecute rests with the office of Attorney General
(AG). What this means is that when MyCC completes its investigation a recommendation
paper needs to be prepared for the consideration of the AG whether to prosecute or otherwise.
Reflecting a long process of engagement and consultations with various parties, the
Act provides a window of opportunity for enterprises to apply to the Commission for an
exemption and relief of liability for the infringement of the provisions of the Act provided
they can satisfy the following conditions:
(i)
There are significant identifiable technological, efficiency or social benefits
directly arising from the agreement;
(ii)
The benefit could not reasonably have been provided by the parties to the
agreement without the agreement having the effect of preventing, restricting or
distorting competition;
(iii)
The detrimental effect of the agreement on competition is proportionate to the
benefits provided; and
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(iv)
The agreement does not allow the enterprise concerned to eliminate
competition completely in respect of a substantial part of the goods or
services.
In addition, the Act also provides a special exemption to enterprises established and
operated under the Communications and Multimedia Act and Energy Commission Act.3 It
should be noted that the Act specifically says that its provisions apply only to agreements
between enterprises. On the surface of it the Act applies only to official undertakings
between enterprises whereas unofficial anti-competitive actions and behaviours seem to be
beyond the coverage of the Act. In a way this reflects a leniency of the Act in comparison to
other established competition laws.4
Costs and Benefits of Malaysia’s Competition Act
The costs relating to having a competition law are primarily in terms of expenditure in
which the Government has to fork out to ensure a smooth implementation and enforcement of
the Act. These include expenditure for the operation of MyCC, the agency established to
implement the competition law. In addition the Government needs also to beef up prosecution
officials at the AG’s office. It is estimated that for these purposes the Government needs to
spend RM200 million for the first 3 years from the date the Act comes into effect, which
begins this year (2012). Considering the important of the Act to the Malaysian economy it
could be argued that it is worth the money for tax payers to bear since the biggest
beneficiaries of the Act are the people at large.
Benefits
It should be admitted that it is much more difficult to estimate direct benefits of the
Competition Act, especially in terms of nominal monetary values in comparison to estimating
the costs. From the perspective of economics, it is for sure that the Act brings enormous
benefits. These benefits come in three different forms: (1) increase economic efficiency (2)
3
This specific exemption is provided in First Schedule of the Act, and the Minister of Domestic Trade and
Consumer Affairs can amend the First Schedule by an order published in the Government’s Gazette.
4
The US antitrust law for example has three broad classes of activities which are unlawful: (1) Collusive
behaviours such as attempts by oligopolies to fix prices or form cartels; (2) Mergers that reduce competition and
raise industrial concentration to unacceptably high levels; and (3) Monopolization of an industry by a dominant
firm.
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address problems associated with market failures and (3) curb the market power of
businesses.
Increase Economic Efficiency
For an economy to be efficient it needs to achieve two conditions:
productive
efficiency and allocative efficiency. Productive efficiency has two aspects, one concerning
production within each firm and the other concerning the allocation of production among
firms in an industry. Productive efficiency for the firm requires that the firm produce any
given level of outputs at the lowest possible cost. Productive efficiency requires that the firm
uses the least costly of the available methods of production.
Meanwhile, productive
efficiency for the industry requires that the industry’s total output be allocated among its
individual firms in such a way that the total cost in the industry is the lowest (minimized). If
an industry is yet to be productively efficient, it is possible to reduce the industry’s total cost
of producing any given output by reallocating production among the industry’s firms.
Therefore, productive efficiency for the industry requires that the marginal cost of production
must be the same for all firms.
Allocative effiency, meanwhile, concerns with quantities of the various products to be
produced. An industry is allocatively efficient when, for each good produced, its marginal
cost of production is equal to its price. Therefore, market is at the most efficient when both
productive efficiency and allocative efficiency are attained.
The only market structure that satisfies these two conditions is perfect competition, in
which each firm produces outputs at the lowest point on its long-run average cost curve.5 At
this point its cost is minimized. However it is to be noted that perfect competition exists only
in few industries in modern economics. A vast majority of other industries operate under
market structures characterised either by monopolistic competition, oligopoly or monopoly
and economic efficiency could not be attained under these three market structures. Because
most industries operate in imperfect markets a competition policy is thus needed to provide
the Government with a mechanism to try to increase overall economic efficiency.
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Perfect Competition is characterised by 4 main elements, (1) firms sell identical products (2) Consumers know
the nature of products being sold and the prices being charged by each firm (3) Firms are small in comparison to
industry and they are price takers (4) The industry is characterised by freedom of entry and exit.
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Address Problems Associated with Market Failures
An ideal market structure for an economy is perfect competition. 6 In perfect
competition the market is the most efficient, therefore there is no market failure. Whenever
there is a market failure, the market is considered inefficient. A market failure exists when
industries operate in market structures other the perfect competition. A market failure also
reflects the situation where firms in an industry set a selling price higher than its marginal
cost, thereby enjoying abnormal profits.
Of the four market structures discussed in the
previous section, the highest degree of failure (or imperfectness) is monopoly, the second
highest is oligopoly and the least is monopolistic competition. The whole idea of having a
competition policy is for the government to address this problem by devising policy in trying
to influence markets to move toward perfect competition, achieving if possible, the
characteristic of monopolistic competition. If perfect competition is impossible to attain then
monopolistic competition should be the next target.
Curb the Market Power of Oligopolies
Many businesses operate in oligopolistic industry, whereby only a few enterprises exist.
This gives them a market power in terms of having the ability to set price rather than a price
taker, as it is the case for firms operating in perfectly competitive markets. A firm has a
market power in the sense that it faces a negatively sloped demand curve, thus its marginal
revenue will be less than its price. When it equates marginal cost to marginal revenue, as all
profit maximizing firms do, marginal cost will be less than price. This inequality implies
allocative inefficiency. Competition policy has sought to create more competitive market
structures wherever possible, to discourage monopolistic practices, and to encourage
competitive behaviour where competitive market structures cannot be established. By having
a competition policy the government can devise laws and regulations to deal with
uncompetitive behaviours of oligopolies thereby curbing their market powers.
Challenges in Implementing Competition Law in Malaysia
The Malaysia’s Competition Act, which was passed by the Parliament in 2010, comes
into effect only this year. A substantial time is provided for the Act to take effect may be
6
It is important to re-emphasis that perfect competition is a theoretical ideal that exists in a small number of
industries, is at best only approximated in some industries, and is not even closely resembled in most.
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argued to represent two things. One is to allow businesses to have a good understanding
about the provisions of the Act and to come to terms with those provisions. The other is to
ensure proper preparation can be made on the part of the Government to implement and
enforce the law. These include the setting up of the MyCC, training its staff and coming up
with detail guidelines and procedures in relation to conducting its investigation.
At the outset two major challenges could be foreseen for MyCC to implement and
enforce the Act. The first challenge is to deal with the lobbying power of policy-created
monopolies and oligopolies. In Malaysia it is still a dominant idea that the bigger and
stronger a business is the better for the country. This idea does not only exist in the minds of
captains of businesses, but also in the minds of vast majority of public officials and policy
makers. It is also a kind of thinking among them that they know inside-out of a particular
industry. These include the situation of demand and supply for a particular product, therefore
it is imperative for them to determine how many players should be in that particular industry.
In addition, it is a common sense argument among these people that too much
competition is not good for the country, especially if there are cases of businesses that do not
survive and have to wind up. Whereas it is a standard argument among economists that a
competitive market resembling perfect competition should be represented by an active role of
market participants. This includes not only the entry of new players into the industry but also
the exit of existing players from the industry, some of them unavoidably due to stiff
competition.
Supplementing this thinking is the lobbying power of businesses themselves.
More often than not captains of businesses have a closed connection with top echelon of
Malaysian leadership. It is reasonable to expect that when a particular business or industry
runs into problem in terms of infringement with any provisions of the Act they would lobby
leadership at the very top for exemption or special treatment to the extent that it warrants an
amendment to the Act.
The second challenge comes in terms of establishing a prima facie case on suspects by
investigating officers from MyCC. As this agency is still at the infancy stage it is natural to
expect that it needs a lot of training and capacity building programs for its staff. As we learn
from antitrust cases in other countries establishing a case against businesses infringing
provisions of competition laws is not an easy task and require special skills, expertise and
experience.
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The third challenge is in relation to the adequateness of the Act to deal with anticompetitive
behaviours of businesses. In the present form the Act specifically targets infringements of its
provisions contained in official agreements between enterprises. Again as we learn from
countries with lots of experience in dealing with the market power of oligopolies and
anticompetitive behaviours of businesses many of them are done unofficially, not through
official agreements. To have a full benefit from having a competition policy a broad class of
activities which may result in anticompetitive behaviours need to be taken into account,
possibly on a gradual basis. These include the formation of cartels, collusive behaviour in
whatever forms, mergers which result in reduced competition and predatory pricing.
However, at the moment, the step by step approach undertaken by MyCC in dealing with
multiple issues surrounding competition policy may be appropriate given the circumstance
that Malaysia has faced.
Conclusion
Malaysia has taken close to two decades before it can finally introduce a competition policy.
This reflects difficulties faced by proponents, mainly officials at Ministry of Domestic Trade
and Consumer Affairs, to convince not only leadership at the very top but also captains of
businesses about the virtue of having this policy for the country. The Competition Act, which
was approved by the Parliament in 2010 will only come into effect two years later, beginning
in 2012. The enforcement of this Act will not only bring benefit to ordinary people but will
also improve economic efficiency of the economy.
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