Caixin
Dec 11, 2018 02:04 PM
OPINION

Editorial: Flawed Incentives Hobble China’s Antitrust Reviews

In the 10 years since the anti-monopoly law was implemented, many in the policy, business and academic spheres have reflected on the law, and made suggestions. The problem of fair-competition review, which is closely tied to anti-monopoly efforts, has also attracted significant attention.

Two years ago, the State Council set up the fair-competition review system. A year ago, provisional detailed rules and regulations for the system were rolled out. The decision-making level has clearly supported “gradually establishing the basic position of competition policy,” raising hopes in business and academic circles. The relevant departments must now seriously evaluate the system’s results and how to improve it, and take action on the issue.

The fair-competition review system is intended to prevent policies that suppress market competition from being introduced — usually, such policies favor state-owned enterprises at the expense of private ones. If this system is properly implemented, it will undoubtedly greatly regulate government behavior, clarify the boundaries between policy and market, nip administrative monopolies in the bud, reduce regional and industrial barriers to entry, promote fair competition in a unified national market, and create a good business environment for enterprises.

According to official data, as of the end of October, a whopping 122,000 documents were reviewed by various departments and local governments. However, the proportion of such documents found to be problematic and subsequently revised was negligible. Unfortunately, it seems that this isn’t because the policy documents are all impeccable, but because the holes in the “net” of review are too large. Downward pressure on China’s economy is currently increasing, and local governments are possibly hoping that preferential policies and the misuse of subsidies and tax breaks can boost low growth. The importance of a fair-competition review system has never been more prominent.

A good system cannot take root without a rational, effective operating mechanism. The core questions of fair competition review are who will review and how to review. Currently, policy-setting organs employ a self-review model, in which a section or multiple sections of a particular department are responsible for inspecting the same department. It goes without saying that the self-inspection system is vulnerable to abuse. It is very difficult to be fair and objective when one is one’s own judge. Colleagues who know each other will inevitably apply looser standards to each other. Filling out forms and checking off items can become a mere formality. In order to properly fulfill the function of a competition review system, China must further constrain government behavior and improve the processes and mechanisms of its competition review system. Even as it uses the existing monitoring mechanism, it should pay more attention to external supervision.

The main problem with self-review is a lack of motivation. Even though top-down executive orders can exert some pressure, when it comes to review methods, processes and quality, every locality and department still has much room to run its own operations, and it is especially difficult to prevent selective review. Different regions and departments have different standards. In some places, officials have a vague understanding of regulations and tend to procrastinate or simply go through the motions, and even re-examine documents that have already been cleaned up as part of other reforms just to boost their own track records. In addition, it is easy for local governments to focus on easier-to-review documents while ignoring more complex but more important ones. In order to properly conduct fair competition reviews, China must inevitably move the interests of government departments and reshape its incentive mechanism.

The motivation and effectiveness of departments conducting self-review can be raised in two ways: through internal mechanisms and external supervision. First, China must make up for the shortcomings of the current mechanisms. Review standards are gradually being refined, but their content is still crude and difficult to act on. Existing regulations say that any unit or individual may lodge a complaint if a document has been issued without undergoing a fair-competition review or is in violation of review standards. However, the existing system does not include a rational and detailed internal feedback mechanism: With whom should a complaint be lodged? What is the process of reporting a violation? And is the internal feedback mechanism well-developed and independent? It is not clear what the answer to any of these questions is.

Secondly, the strength of anti-monopoly organizations deserves special attention. China’s anti-monopoly law clarifies that when administrative organs abuse their power to exclude or limit competition, anti-monopoly law enforcement organs can propose legal means of dealing with the problem to the relevant higher authorities. According to the plan for the fair-competition review, if a government department violates the fair-competition review system, units and individuals can also report the violation to anti-monopoly law enforcement agencies. If a department is suspected of violating the anti-monopoly law, the anti-monopoly law enforcement agency may carry out the necessary investigation. Policymaking bodies may also consult with anti-monopoly law enforcement agencies on problems encountered in fair competition review. International experience shows that the self-examination process is indispensable. But anti-monopoly law enforcement agencies also often participate in the review process. In China, anti-monopoly agencies could do more, while policymaking departments should be systematically compelled to give up some of their powers.

Finally, the fair-competition review process should involve the opinions of experts, scholars, legal consultants, and professional institutions, as well as those of stakeholders. The stakeholders include operators in the relevant market, upstream and downstream operators, as well as consumers. Only through expanding information disclosure can we ensure optimal participation. In nonconfidential situations, the details of competition reviews should be open to the public. Disclosure not only maximizes the fulfillment of the public’s right to know, but also maximizes the motivation of all parties involved, avoiding situations where “independent third parties” are actually colluding with officials or where their involvement is just for show.

Many have called for the fair-competition review system to be incorporated into the anti-monopoly law. This would provide a legal basis for competition review, avoiding the awkward situation of using documents to implement documents. We support this reasonable suggestion. At the same time, China should not wait for improved legislation to introduce a series of test cases for a fair-competition review. Those who actively strive to improve the system should be commended, while government departments that drag their feet must firmly be held accountable.

Competition is the engine of the market economy. It is also the driving force for the evolution of institutions. Fair competition is the most powerful, most rational and cheapest mechanism for separating the wheat from the chaff among market players, and for determining the direction of economic innovation. At present, institutional reforms lack an intrinsic impetus, and private enterprises face deep unfairness. Only by strengthening fair competition can the economy be stimulated on a micro level. Government departments have a duty to do this, and work on the fair-competition review system should be incorporated into the administrative performance reviews of all levels of government as soon as possible.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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