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Bad news for cartels, good news for the poor in Latin America

Martha Martinez Licetti's picture

Milk, sugar, poultry transport, energy and medicine make up between 15 percent and 20 percent of the expenditure of the average household in Latin America. But consumers are receiving fewer of these essential goods and services for their money than they should.

Why? Because, in some parts of Latin America, firms supplying these markets agree not to compete, choosing instead to jointly fix higher prices, restrict total production or obstruct the entry of new competitors – that is, to create economic cartels.

Over just the past four months, competition authorities in Latin America have opened investigations of, or have detected, many cartel agreements:
 

  • In Colombia, sugar mills, a trade association and trading companies coordinated to obstruct sugar imports from entering the market in order to keep domestic sugar prices artificially high.
  • In Brazil, three firms appear to have agreed not to reduce the price of milk that is consumed by poorer households.
  • In Honduras, the association of chemical pharmacists enforced minimum-distance rules between pharmacies, creating local monopolies.
  • In Peru, five gas suppliers for domestic gas use allegedly raised prices simultaneously by $14 to $17 per metric tonne.
  • In Mexico, bus companies agreed to fix prices and restrict their supply of services over four years.


Are these isolated cases? No. According to new data compiled by the World Bank Group (WBG) and the Regional Competition Center of Latin America, Latin American economies since 2008 have been affected at least 100 times by such harmful agreements, based only on the cartel cases that have already been sanctioned and fined. Empirical data suggests that these cartels charge on average 30 percent higher prices. A forthcoming WBG study shows that, in Latin America, firms create cartels mostly in non-tradable goods and in the services markets. Almost half of the cartels in services involved some means of transportation, and 60 percent of the cartels in goods markets targeted food products.

Cartel agreements are not a new development. Consumers in Peru have overpaid for chicken and flour in the 1990s, for accident insurance in the 2000s, and apparently for cooking gas nowadays. In Mexico, an inhabitant of Chiapas will have overpaid, in the first decade of this century, for tortillas, chicken, telephone services, refrigerators and passenger transport.

This matters, because cartels harm the poorest. The alleged cartel agreement in Brazil was on a milk product that is mostly consumed by lower-income households, or “a guy from a humble family,” as one of the cartel members acknowledged, according to the authority. About 80 percent of Peruvian households that use gas as their primary source of energy allegedly paid more because gas suppliers colluded to keep prices high. The Mexican bus cartel was active in 13 municipalities in the state of Chiapas, where nearly 1 million people live in moderate to extreme poverty. The bus cartel, on a single route, forced consumers to pay a total of $2.5 million more.

Anticompetitive agreements make other public policies less effective. An engineer’s cartel fined earlier this year in Peru affected public-construction contracts worth $50 million that had been designated for the expansion of the public highway network. According to the case, the Colombian sugar cartel used the Stability Fund as a tool to coordinate production and distribution quotas. The Peruvian competition authority’ official statement of objections notes a joint decision by the gas companies not to pass along to the consumer the Value Added Tax rate reduction of 2011.

The majority of these countries are pursuing new trade agreements,  investing more in infrastructure and improving tax policies. The development impact of these measures could be much higher if firms were prevented from distorting the effects of these measures to their own advantage, through adequate competition policies.

The cartels that have already been detected are only the tip of the iceberg.  Empirical data suggests that, in advanced economies, there are between three and 10 times as many cartel agreements as competition authorities manage to detect. It is likely that the number of cartels that go undetected is even greater in Latin America, where competition authorities work with more limited budgets. In less-developed economies in the Latin American region, there is almost no anti-cartel enforcement.

Fortunately, the track record on cartel enforcement is improving – and here’s why: Competition authorities’ powers are changing, and their ability to detect and prevent cartel behavior is improving. Institutional strategies explicitly focus on anti-cartel enforcement. Decision-makers and civil society are also beginning to grasp the extent of harm caused by cartels and are increasing their enforcement efforts.

How can the WBG and governments continue working together, to add momentum to the trend of better anti-cartel enforcement?

First: By strengthening the tools that help detect and sanction cartels. Governments throughout Latin America have provided their competition authorities with better investigation tools and implementation techniques. Thanks to technical assistance by the WBG, Peru and Honduras have introduced a clear and transparent leniency program: This tool gives cartel members the attractive option of avoiding fines by providing authorities valuable evidence that can help in the prosecution of the remaining cartel members. As firms typically collude in more than one country, the WBG is creating a regional screening tool based on evidence of cartel trends and networks, jointly with the Regional Competition Center for Latin America.

Second: By removing rules that unintentionally make it easier for firms to cartelize in the first place. Evidence amassed by the WBG has shown that, throughout Latin America, cartels move to countries where public policies prevent outsiders from competing in the marketplace. Even in the examples cited above, public actions mattered. There was no limit to the extent of self-regulation by the associations in Honduras, so that the chemical pharmacists were able to establish local monopolies. Recent reforms in Peru showcase how to set up tools to address this: Peru’s competition authority would now be able to sanction any public officials who facilitate anticompetitive agreements, and other entities can no longer ignore their suggestions on how to make markets more contestable.

Third: By deepening our understanding of market dynamics and by measuring the effects of anticompetitive behavior. Market players react to economic incentives and engage in strategic behavior. Ignoring the strategic interaction between market players would limit our understanding of the mechanism through which public policies can achieve our development objectives (or not). When firms are able to jointly undermine competitive dynamics, then prices and other market outcomes reflect the artificial scarcities of supply, causing the inefficient allocation of resources and thus eroding socioeconomic welfare. Understanding which markets are more prone to collusion, and analyzing how public policies can support or deter the development of cartel behavior, becomes crucial. Similarly, measuring the costs of cartel behavior for society will help overcome potential political-economy considerations and will help provide relevant ammunition to competition champions.

At the World Bank’s Annual Meetings in Lima, there were detailed discussions about how to continue social progress and equitable economic growth in a “new normal” of lower growth rates and tighter fiscal space. Conditional cash transfers in Mexico, Brazil and Peru improve the lives of those enduring extreme poverty by adding around 10 percent to their income. So why not invest in tackling economic cartels, which artificially increase the prices of basic consumer goods? How about, by 2030, aiming to cut at least the 30 percent extra that poor people are now forced to transfer to the pockets of cartel members because of their anticompetitive collusion?

To read more about the full offering by the World Bank Group on Competition Policy, see Anabel Gonzalez’ blog post here

Disclaimer: The references to individual cases made in this text are strictly based on public available information, do not represent the views of the World Bank or the authors and do not constitute legal opinion. Accordingly, no inference should be drawn from this text as to the completeness, adequacy, accuracy or suitability of the investigations and decisions adopted by each Government on individual cases quoted.

Comments

Submitted by Prof. John M. Connor on

Dear authors:

Thank you for bringing public attention to a topic that I have been writing about since the mid 1980s. Until recently (with the work of Piketty and colleagues), the importance of the negative income-redistribution effects of collusion has been largely ignored by economists. Keep up the good work!

Dear Prof. Connor,

Thank you for your interest in our blogs. Indeed, your seminal work, including the paper we cite in this blog (via hyperlink), has been highly revealing and inspiring for many to identify the impact of private cartels. We also appreciate your contribution to our Global Network of Experts on Competition and Shared Prosperity and hope to continue exchanging ideas about how to measure the effect of cartel behavior on the bottom 40% and the poor. Warm regards.

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