A New Competition Law for Georgia: Much Ado About Nothing?

A New Competition Law for Georgia: Much Ado About Nothing?

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Georgia should do a better job at keeping the state and private monopolies at bay in terms of service quality, prices, and access for competitors in downstream industries. At the same time, Georgia should not be politically, ideologically or otherwise committed to cut-and-paste European institutions.

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The mountain of promises to modify Georgia’s liberal labor code has recently produced a little mouse in the shape of a statement by Deputy Prime Minister Giorgi Margvelashvili who, according to GeorgiaNews.ge, “branded the new labor code project a “dream of Rosa Luxemburg”. GeorgiaNews.ge also knows to tell that “Prime Minister Bidzina Ivanishvili supported Education Minister Giorgi Margvelashvili’s position on the matter and thought employers should be the side to enjoy the government’s support “at this stage”. The Prime Minister added employees should have rights, but investors should not be “discouraged” to invest in Georgia.”

What these statements betray is a willingness to admit that tinkering with the labor code – a key Georgian Dream’s election campaign demand – would do little to promote job security for a huge contingent of Georgian under- and un-employed. A victory for pragmatism, for short. Should we now expect pragmatism to prevail in connection with another GD campaign promise – to do away with the allegedly ubiquitous monopolies?

According to Ketevan Lapachi, a senior Economic Development Ministry official who presented the government’s plans for the new competition policy at a recent EU-Georgia Business Council seminar, Georgia is about to adopt a full competition policy package, including a strong competition law and an independent competition authority in charge of applying post-factum sanctions and preventing abuse of market dominance. Lapachi is not blind to the challenges of implementing a sophisticated competition policy in a weak institutional and professional environment. However, she is cautiously optimistic that the new competition authority will be able to acquire the needed economics expertise. She is also confident in the agency’s ability to act in an independent and professional manner – i.e. eliminate or at least reduce the risk of corruption and resist undue influences by powerful industries.

There are two pragmatic reasons to rethink this strategy:

First, establishing a strong (and expensive) competition authority only makes sense if it is competent and immune to corruption. It is worth reminding ourselves in this context that the old competition authority was scrapped back in 2005 since it produced little value other than enriching a few individuals. Not surprisingly, there was little public outcry over this notorious agency’s untimely death.  Now, the risk of corruption is still real while relevant skills and experience are as scarce today as 8 years ago.

Second, while there is no arguing about the benefits of strong competition, it is much less obvious that spending scarce public funds on the creation and maintenance of an expensive competition agency is the best way forward. In fact, there are many other ways to curb anti-competitive practices.

  • For instance, Georgia should continue with deregulation and trade liberalization measures, removing barriers to entry (such as licenses) and opening Georgia to competition from abroad. For a small country like Georgia, making sure that Georgian firms face the threat of foreign entry is the most effective ways to increase competition, reduce prices and improve the quality of goods and services.
  • The government itself should not be allowed to interfere with competition by sponsoring “loyal” businesses; state-controlled monopolies, such as Georgian Post and Georgian Rail, should be prevented by law from abusing their dominance;
  • Regulations should be imposed on private monopolies that have been created in recent years through privatization of “essential facilities” such as underground communications (in large cities such as Tbilisi), air and sea ports, without adequate constraints on future pricing and access policy. An unconstrained monopolist in possession of an essential facility is very likely to provide low quality services while charging inappropriate access fees, harming competition and, subsequently, consumers.
  • Instead of focusing on cartel detection and preventive measures such as merger control (very ineffective when applied to firms in a budding industry that operate below optimal scale), the government should create the legal environment that would destabilize cartel arrangements and lead to their collapse. For example, the new competition law could impose heavy fines on cartel members while providing immunity and even monetary incentives to the first cartel participant who decides to cooperate with the authorities.

Georgia’s recent experience in dealing with highly concentrated industries offers important lessons learned. Suspicions of anti-competitive practices have been widely debated in the Georgian media in recent years, e.g. concerning the pharmaceuticals and gasoline markets. Until 2009, the pharmaceuticals market had been shielded from competition by an unnecessary and corruptive import licensing requirement. This led to the creation of an oligopolistic situation with three vertically integrated companies dominating the market. The licensing requirement was lifted in 2009 –  despite strong lobbying efforts by the industry, which happened to be represented in the parliament – facilitating entry by a fourth company and triggering a significant reduction in consumer prices. At present, while the three established actors (Aversi, PSP and GPC) admit to cooperating on the import of drags and dealings with suppliers (to get larger discounts), there is no evidence for anti-competitive practices, such as price collusion, among these companies. Moreover, they appear to be fiercely competing through constant expansion of their retail networks and product innovation. While perhaps not ideal from the competition policy point of view, the situation in the pharmaceuticals market has significantly improved with not a single tax payers’ lari spent on an EU-style independent competition authority.

To conclude, Georgia should have a good competition law. It should also do a better job at keeping the state and private monopolies at bay in terms of service quality, prices, and access for competitors in downstream industries. At the same time, Georgia should not be politically, ideologically or otherwise committed to cut-and-paste European institutions. First, it does not have the luxury of unlimited human and financial resources. Second, it may be well advised to continue to surprise the world with out-of-the-box policy solutions of its own making.

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