Perilous beginnings: the establishment of antimonopoly and consumer protection programs in the Republic of Georgia.
The Republic of Georgia is in the early stages of implementing new antitrust and consumer protection laws. The foundations for competition and consumer protection policy in Georgia are the Consumer Rights Protection Law of March 20, 1996 and the Law on Monopolistic Activities and Competition of June 25, 1996. Responsibility for enforcing these measures resides mainly in the Antimonopoly Service (AMS or Service), which began operating in January 1997. The adoption of the 1996 legislation and the creation of the AMS substantially enhance a rudimentary competition policy system initiated in 1992 by a presidential decree.
In establishing new antitrust and consumer protection mechanisms, Georgia must solve serious problems encountered by the nearly forty countries that, since the late 1970s, have adopted new competition or consumer protection laws as part of the transition from central economic controls to reliance on market processes.(1) Georgia and its transition economy counterparts must build new law enforcement bodies and related institutions amid severe resource austerity, and hostility from government and industry forces that resist economic liberalization. When supporting the creation of competition policy and consumer protection systems in transition countries, technical assistance advisors and donor groups from Western countries and international organizations often overlook the fragility and precariousness of the institutions responsible for executing the new legal commands. Many transition economy competition and consumer protection agencies operate today in a crisis environment, beset by adverse judicial rulings, stout political opposition, weak access to business records, limited expertise, and whirlwind turnover in personnel.(2)
This article examines approaches for dealing with problems of law design and implementation in the context of Georgia's efforts to apply its competition and consumer protection laws. The article draws upon our experiences in 1996 and 1997 as advisors to Georgia's AMS under the auspices of the Center for Economic Policy and Reform (CEPAR), a project sponsored by the United States Agency for International Development. The article first examines the background of Georgia's antimonopoly and consumer protection laws. The article then suggests a strategy for addressing key implementation issues, focusing on how Georgia's AMS and other transition economy enforcement agencies can enhance their institutional capability while designing and executing substantive antimonopoly and consumer protection programs.
II. Background of Georgia's antitrust and consumer protection laws
Georgia's antimonopoly and consumer protection policy began in September 1992 with the issuance of the presidential decree On Restricting Monopoly Activity and Developing Competition (1992 decree).(3) Modeled on Russia's 1991 antimonopoly law,(4) the 1992 decree banned various forms of unfair competition, prohibited anticompetitive agreements and abusive conduct by dominant enterprises, and forbade various acts of government bodies that suppress competition. From 1992 through 1996, authority for enforcing the 1992 decree resided in the Antimonopoly Department of the Ministry for the Economy. An important precursor to the AMS, the Department operated with a professional staff of eight employees from 1992 through 1994 and grew to twenty employees by the fall of 1996. With minimal resources the Antimonopoly Department achieved some significant results under the 1992 decree, including a number of interventions that prevented government bodies from hindering entry. and expansion by new entrepreneurs. Operations under the 1992 decree also provided valuable enforcement experience for officials who later gained key management and staff positions in the AMS.
A. The 1996 legislation and creation of the AMS
Efforts to draft more robust antimonopoly and consumer protection measures began in 1994 and culminated in 1996 with adoption of the Consumer Rights Protection Law and the Law on Monopolistic Activities and Competition. The new statutes adapted approaches used in the antitrust and consumer protection laws of Western countries and former Soviet Republics and incorporated a number of distinctive Georgian features. Among other innovations, article 17 of Georgia's antimonopoly law establishes an advisory body called the Antimonopoly Council consisting of representatives of government agencies, consumer groups, and industry. The council is a novel approach to giving public enforcement officials feedback from public and private constituencies affected by the statute.
By Presidential Decree No. 248 of December 28, 1996, the Antimonopoly Service was created to replace the Antimonopoly Department. The AMS is an independent government institution and reports to the president. Notwithstanding its independent status, the AMS is housed in the headquarters of the Ministry of the Economy and draws upon the ministry's technical resources and political capital to perform its functions. The December 1996 decree expanded the AMS staff to 150 positions and created twelve AMS regional offices throughout Georgia. By a separate decree,(5) President Eduard Shevardnadze appointed Vazha Maisuradze, then Director of the Antimonopoly Department, to be the first director of the AMS.
In January 1997, the AMS submitted an organization plan and bylaws to President Shevardnadze, who approved the measures by Presidential Decree No. 137 of March 14, 1997. The AMS bylaws establish a top management tier consisting of the AMS director, a first deputy, and other deputies assigned to oversee AMS functions as defined by the director. The bylaws also create an internal management board consisting of the director, all deputies, and representatives of other government ministries, departments, and scientific institutions that the AMS director deems appropriate. The Management Board is designed to provide the AMS with an intragovernment sounding board and policy coordination device, and the Antimonopoly Council is intended to supply a vehicle for obtaining the views of constituencies outside the government.
Funding is a common problem for transition economy antitrust agencies. Georgia is experimenting with mechanisms that allow the AMS to retain a portion of the fines it collects for violations of the antitrust and consumer protection laws. In addition to appropriations from Georgia's central budget, the AMS shall receive 30% of amounts paid by violators of the antimonopoly statute and 10% of amounts paid by violators of the consumer protection law. Such devices could give public officials incentives to "discover" violations where the conduct in question is benign. The concern with vexatious public enforcement is attenuated in Georgia by article 30 of the antimonopoly law, which enables companies to sue the AMS for damages resulting from meritless prosecutions.
Approximately 65 of the Service's 150 employees are located in the AMS headquarters in Tbilisi. The December 1996 decree set a February 1997 deadline for the Mayor of Tbilisi to provide office space for the AMS in downtown Tbilisi, but no specific arrangements for relocating the AMS had been made by the end of 1997. AMS headquarters personnel operate from two cramped, sparsely furnished office suites in the Ministry for the Economy. Through 1997, the headquarters office had a single computer and shared all other office equipment with other bureaus of the ministry.
B. Georgia's antitrust and consumer protection legislation
Georgia's antitrust and consumer protection laws prohibit an extensive array of anticompetitive behavior, deceptive marketing practices, and unfair competition and create a two-tiered system of public and private enforcement.
1. ANTITRUST AND UNFAIR COMPETITION The Law on Monopolistic Activities and Competition condemns a mix of traditional trade restraints and business torts. The law reaches conduct by government and nongovernment entities, alike, and relies on public and private parties to enforce its commands.
(a) Unlawful agreements Article 8 prohibits concerted action among economic agents that directly or indirectly restricts competition. This measure bans agreements that restrict a firm's choice of market, source of supply, supplier, or customer; impose tying conditions; or significantly limit competition among substitutable products. This article seems to cover both horizontal and vertical agreements. For example, the prohibition on restrictions affecting a firm's decision about where to operate appears to proscribe both agreements among rivals to allocate geographic territories and agreements by which manufacturers delineate exclusive geographic areas in which their distributors can sell products.
(b) Unfair competition Article 9 condemns unfair competition generally and specifically forbids disseminating information that misleads the recipient and affects commercial activity; failing to disclose information where nondisclosure harms other economic agents and gives a competitive benefit to the party who withholds the information; dumping; disparaging a rival by creating an inaccurate impression of the rival or its products; and misappropriating the copyright, trade name, trade dress, or proprietary trade data of another economic agent. The Consumer Rights Protection Law separately bans sales practices that may fall within article 9.
(c) Government restraints on competition Article 10 of the antimonopoly law bars government action that damages the competitive process. Because government activities are the most serious obstacle to competition in Georgia, this provision arguably is the law's most important feature. Article 10 forbids government bodies from amalgamating budgetary enterprises, unions, consortia, or associations where such moves reduce competition; giving special financial benefits or other competitive advantages to specific firms; impeding activities of entrepreneurs unless Georgian law permits the government to impose such restraints; creating new state-owned enterprises, or authorizing existing structures, for the purpose of restricting competition; or issuing decisions that give individual firms a monopoly. The antimonopoly law does not bar all government action that curbs competition, but article 5.2 vests power to impose such measures exclusively in the Parliament. This provision seeks to insure that trade restraints are not imposed through subtle, rarely observable discretionary acts of individual ministries, regional bodies, or local officials, but are approved only through the relatively more transparent process of legislative deliberations.
(d) Limits on dominant firm behavior Article 11 of the antimonopoly law authorizes the AMS to define the market share threshold above which firms are presumed to hold a monopolistic position. Monopolistic firms are subject to three restrictions. The first deals with concerted action. Article 12 bars dominant firms from entering agreements with suppliers or customers where the agreements restrict, or may restrict, competition significantly.
The second prohibition focuses on the monopolist's unilateral acts. Article 13 generally bars monopolists from abusing their economic power with the intent of discriminating against other market participants. Unlawfully abusive conduct includes curbing production or hoarding products to create a shortage or affect prices; creating barriers to entry or exit; forcing buyers to pay discriminatorily high purchasing prices, forcing sellers to accept discriminatorily low sales prices, or imposing tying conditions; exercising coercion to obtain agreements; setting monopolistically high or low prices that diverge substantially and persistently from the seller's costs; curbing production below levels at which output would continue to be profitable; and dumping.
The third prohibition involves mergers. For mergers that yield a monopolistic position, article 14 requires the AMS to review such transactions and bars the courts from registering the merged party (Georgia's equivalent of incorporation) if the Service issues a negative opinion about the merger. Article 23 compels firms that already hold a monopolistic position and seek to acquire a controlling interest in another firm to undergo review of the proposed transaction by the AMS.
Monopolistic firms that are recidivist violators face special penalties under the law. Article 15 imposes sanctions on economic agents that occupy a dominant position and repeatedly violate the antimonopoly law. Repeated violations may be sanctioned with dissolution, limits on prices or profits, or other remedies that the AMS proposes.
2. CONSUMER PROTECTION The Consumer Protection Rights Law has three types of substantive provisions. Article 3 requires sellers to comply with mandatory product quality standards established by Georgian statutes and by the regulatory decrees of Georgian ministries entrusted with environmental protection, health, and safety responsibilities. Sellers must certify that they have fulfilled mandatory product quality standards and are obliged to cease producing or selling goods that are found by government agencies to pose a hazard to the environment, health, or safety.
Articles 4, 5, and 8 of the Consumer Rights Protection Law compel sellers to inform buyers about various product features. Article 5 compels disclosure of the seller's identity and location. Article 6 requires the seller to reveal the name of any mandatory quality standards that apply to the product; the product's price and other conditions of sale; for food products, a list of ingredients and nutritional data; prescriptions for using the product; the expiration date; and the fact that the seller has made required quality certifications. Sellers can convey the required information by labeling the goods, attaching documents, or through other methods "adherent to the particular type of good."
The consumer rights law also creates a cause of action for the breach of contractual sales terms involving goods or services. Article 13 treats any deviation from mandatory or contractual quality standards as a breach, and article 17 treats a failure to fulfill the specified delivery schedule as a breach.
3. AREAS OF SHARED RESPONSIBILITY Some features of antimonopoly and consumer protection policy under Georgia's laws are entrusted to both the AMS and other government entities. In some instances, the bounds of shared responsibility are clearly defined. In others, the allocation of authority between the AMS and other government agencies can only be inferred.
(a) Antimonopoly policy Article 1.4 of the Law on Monopolistic Activities provides that a state register of natural monopolies will be approved by the president. This implies that the AMS will be responsible for compiling the register. It is also possible to infer that natural monopolies included on the register are subject to restrictions (including price controls under article 13.e) contained in clause IV of the antimonopoly law, which governs the conduct of enterprises holding monopolistic positions. In separate legislation, the Parliament has created an autonomous regulatory agency to control tariffs and other terms of trade for natural monopolies in the electric power sector. The new law does not define the relationship between the AMS and the new energy regulator, nor does it preclude antitrust oversight, including AMS supervision of access pricing and interconnection terms.
Article 6 of the antimonopoly law contemplates shared competition policy authority for securities and financial services. Article 6 indicates that other "appropriate legislative acts" will supply the framework for scrutinizing monopolistic practices and unfair competition in the market for securities and financial services. However, article 6 gives the AMS jurisdiction where the conduct in question adversely affects competition in other relevant markets in Georgia. This exception appears to give the AMS power to prosecute a wide range of conduct involving securities and other financial services firms. Many forms of competition-suppressing conduct in the financial services sector are likely, directly or indirectly, to affect competition in product markets. Examples might include a banking cartel that sets interest rates at supracompetitive levels, raising the cost of capital and denying entrepreneurs access to loans, or an agreement between an incumbent enterprise and a group of banks or securities brokers by which the banks and brokers refuse to help the incumbent's rivals raise capital.
(b) Consumer protection policy The Consumer Rights Protection Law distributes policymaking authority among four actors in Georgia. Article 30 authorizes the AMS to challenge violations of the statute in the courts. Article 31 directs government ministries for environmental protection, health, and public safety to specify mandatory product quality requirements and to require the withdrawal of nonconforming products. Article 32 gives government officials of the territorial administrations power to investigate consumer claims and "undertake due measures" where an inquiry reveals product flaws or safety dangers. Article 33 allows consumer associations to participate in setting mandatory quality standards and to submit proposals to the AMS regarding improvements in product quality or the withdrawal of products that may pose environmental, health, and safety dangers. Article 34 also gives consumer groups standing to sue in Georgia's courts to challenge violations of the consumer protection law.
4. ENFORCEMENT AND POLICYMAKING MECHANISMS Georgia's laws decentralize the decision to prosecute more expansively than other transition economy antitrust and consumer protection statutes. Articles 20 and 21 of the antimonopoly law give the AMS enforcement authority, and article 29 creates a private right of action. Article 29 gives economic agents and other interested parties standing to sue in court to obtain compensatory damages for illegal conduct. Article 30 also gives economic agents the right to sue in court for damages resulting from illegal activities of the AMS.
Like the antimonopoly law, the Consumer Rights Protection Law establishes a multilevel enforcement structure. Many substantive obligations of sellers are created by mandatory quality standards promulgated by other government ministries. Article 31 of the consumer protection law assigns to government ministries with portfolios for environmental protection, health, and safety the responsibility for developing the mandatory standards. Article 31 gives these ministries power to notify firms that they must cease the production or sale of dangerous goods, to remove such products from the market, and to inform consumers about hazardous products. By this provision, ministries seem to have broad authority to halt the production and sale of hazardous products and, by implication, to seek relief in court where sellers fail to comply with a ministerial notice. Article 32 seems to give similar power to government officials in Georgia's territorial administrations.
The consumer protection law does not authorize Georgia's territorial administrations or ministries with environmental policy, health, and safety duties to challenge contract breaches that are made actionable under the statute. The power to sue to challenge breaches of quality, information disclosure, and delivery obligations is vested in the AMS under article 30 and in consumer associations under article 33. It is conceivable that article 12 also gives individual consumers standing to challenge breaches of duties created under the law.(6) Even if article 12 does not give individual consumers standing to sue, the law explicitly gives consumers limited rights of self-help. Articles 13-29 authorize consumers to raise claims directly with nonperforming sellers and to request remedies such as rescission, refunds, and repairs. If the seller rebuffs these requests, and article 12 does not give standing to individuals, then breach of contract claims must be vindicated in suits by the AMS or consumer groups.
5. IMPLICATIONS FOR IMPLEMENTATION The substantive prohibitions and enforcement mechanisms outlined above have major implications for the efforts of the AMS to implement Georgia's antimonopoly and consumer protection laws. Several significant implementation consequences stand out.
(a) Need for selectivity Georgia's antimonopoly and consumer protection laws establish four distinct legal regimes: a set of traditional antimonopoly controls; an apparatus for overseeing the activities of natural monopoly enterprises; a framework for challenging unfair business practices such as misleading advertising, misappropriation of intellectual property, and the improper disparagement of competitors; and a consumer protection system that forbids a broad collection of seller failures to fulfill mandatory product quality, information disclosure, and delivery terms.
To implement any one of these legal regimes successfully would be a substantial undertaking for a new government institution. To implement all three simultaneously is an enormous challenge, even where the public enforcement body is well-funded and the nation's courts are experienced in the resolution of commercial disputes. The AMS faces significant resource constraints, and the Georgian courts have scant familiarity with concepts essential to resolving disputes involving competition and consumer protection issues. It is difficult to overstate the magnitude of the task that the 1996 legislation assigns to the AMS and the Georgian judiciary.
By necessity, the AMS must be highly selective in its choice and phasing of enforcement activities. The AMS must develop an analytical framework that identifies the most serious market failures and suggests remedial strategies that achieve the maximum consumer benefit with the smallest possible use of resources. Creating such a framework and devising the operational criteria for applying the framework must be central AMS priorities in the early years of its existence. Selectivity also requires a strategy for dissipating political pressure to bring cases that would undermine the competitive process or to forego matters that benefit consumers but endanger incumbent firms, especially state-owned enterprises. To be effective, antimonopoly and consumer protection enforcement officials in transition economies must carefully build political capital and spend it wisely.
Within Georgia, the AMS has been criticized for doing too much and too little. Some AMS enforcement efforts (particularly those attacking government efforts to suppress competition) have angered incumbent enterprises and their ministerial patrons. Beneficiaries of the status quo have used their economic and political power to seek to prevent the Service from pursuing matters that promote the national interest. On other occasions, by refusing to challenge behavior such as alleged episodes of dumping by importers who offer superior products at lower prices and reduce the sales of domestic producers, the AMS has attracted demands to bring cases that would diminish consumer well-being. The AMS must choose cases with an eye to building political support that will help it pursue matters that strengthen market processes, and to resist political demands that it take action that would reduce competition and restrict consumer choice.
(b) Harmonizing antitrust and consumer protection Georgia's new laws recognize the important tie between antimonopoly policy and consumer protection policy. This awareness is evident in article 30 of the consumer protection law, which enumerates the consumer protection responsibilities of the AMS. Among other duties, article 30 states that the AMS shall restrict unfair competition and monopolistic activities in consumer markets-an acknowledgment that preserving robust competition among suppliers is a powerful form of consumer protection.
Combining antimonopoly and consumer protection obligations in one agency requires the AMS to harmonize the enforcement of the two legal regimes. Advertising regulation provides an example. The AMS's consumer protection mandate includes scrutiny of false or misleading advertising. Overly restrictive policies toward advertising could undermine attainment of important competition policy goals. Advertising is a vital means by which firms (especially new entrants) tell consumers about their products by providing comparative information about prices and quality. The AMS antimonopoly and consumer protection departments must develop a common understanding of what constitutes sound policy and choose cases that reflect the understanding.
(c) Implementing guidelines Many parts of Georgia's antimonopoly and consumer protection laws give the AMS extensive discretion to determine which business practices fall within the statutes' prohibitions. In this respect, the Georgian laws follow typical international standards. The antimonopoly and consumer protection laws of most nations use general language to articulate basic principles and prohibitions, and rely on administrative elaboration to supply specific operational content. In Georgia, administrative clarification of many specific statutory provisions will be necessary to insure that the 1996 statutes provide suitable guidance to affected parties, redress truly harmful behavior, and do not deter desirable business conduct.(7) The following example illustrates the point.
Article 13.b of the antimonopoly law bars any firm with a monopolistic position from creating barriers to entry or exit in the market for the purpose of encumbering either new entrants or existing competitors. Suppose that an incumbent monopolist obtains the agreement of a local government body to deny a business license to a prospective competitor. It would be desirable for the AMS to use article 13.b to condemn such conduct. Here the behavior that establishes the entry barrier cannot be justified by any tendency to lower production costs, to improve product quality, or otherwise increase business efficiency.
In other instances, prohibiting conduct that creates a barrier to entry might be counterproductive. Suppose that a firm acquires a monopolistic position by supplying high quality products over a long period of time. The monopolist's efforts create brand loyalty among consumers. Such brand loyalty may impede entry by a firm whose products are unknown to consumers. When a firm develops a strong consumer following by supplying the best product on the market, its competitors might argue that the monopolist is improperly creating an entry barrier that prevents new rivals from taking away sales. But it would be perverse for antimonopoly policy to discourage enterprises from creating a loyal clientele through superior performance. Administrative regulations or other policy guidance will be necessary for the AMS to tell external groups and its own staff what types of conduct illegally impede entry, and what conduct establishes entry obstacles that are acceptable results of exercising superior commercial skill.
(d) Coordination with other government bodies The distribution of antitrust and consumer protection authority across several agencies creates possibilities for wasteful duplication of effort and the pursuit of contradictory policies. To avoid the redundant expenditure of resources and to achieve consistent policies, the AMS and its counterpart agencies will need to establish interagency coordination mechanisms. These can take the form of working groups or committees that meet regularly to discuss areas of common responsibility and design common policies. The AMS has taken a number of steps to build such coordination mechanisms, including the creation of an intergovernmental council to organize policymaking on consumer protection issues among the AMS and other government bodies.
III. Suggested implementation approach
In executing its responsibilities under the competition and consumer protection laws, Georgia's AMS might profitably focus its energies on three basic short-term goals. The first is to continue building the institutional capability of the AMS and other institutions, such as Georgia's judiciary, whose activities will influence the implementation of the country's antitrust and consumer protection statutes. The second aim is to educate business operators, government bodies, nongovernment organizations, universities, and consumers about the purposes and requirements of Georgia's antimonopoly and consumer protection laws, and to publicize AMS efforts to carry out its responsibilities. The third goal is to design and apply a substantive enforcement program that establishes the credibility of the Service's enforcement powers, accounts for existing institutional constraints, and deflects political demands for enforcement approaches that would be counterproductive.
A. Building the AMS and related institutions
The first priority for the AMS should be to build a strong institutional foundation for carrying out substantive enforcement programs in the fields of antimonopoly and consumer protection law. The AMS may feel pressure to invest minimal effort in institution building and to emphasize the prosecution of cases that it can hold out to external constituencies as evidence that it is a vital, functioning body. The AMS faces a great tension between satisfying external demands for "action" and accomplishing more mundane but vital administrative and organizational tasks that are necessary to get the new institution on its feet. Institution building does not have the same apparent pay-off as the prosecution of a highly visible case, but it is vital to the ability of the AMS over the medium and long term to use its enforcement authority effectively. Attending to organizational and administrative details in the near-term will pay handsome benefits in the future.
1. BUILDING A SKILLED PROFESSIONAL STAFF The AMS currently has authority to hire a total of 150 employees. For a country of 6 million citizens, this number should suffice to permit the agency to perform its mission effectively. As it fills professional staff positions, the AMS must address two specific needs. The first is to develop a capable law department. Particularly in the early stages of its existence, the AMS will be required to convince Georgian judges that its cases rest on sound legal principles and are meritorious in substance. To do this, it is essential to have a small number of lawyers well trained in litigation and Georgian administrative practice to advise the leadership and staff of the Service. There are huge institutional benefits for the AMS to win its first cases in court, and a strong legal staff will be crucial to achieving this result.
Second, the AMS will need to train existing and new employees in the concepts and practical techniques of antimonopoly and consumer protection law. Many members of the AMS leadership have participated in foreign training seminars hosted by the Organization for Economic Cooperation and Development (OECD) and the United Nations Committee for Trade and Development. The AMS also has begun internal training efforts for new employees. The mix of training should consist of continued participation by AMS officials in foreign training exercises; conducting occasional conferences and seminars involving participation by foreign advisors; and regular internal training exercises conducted by AMS personnel in the headquarters and regional offices. The latter category of training could include standardized exercises based on Georgian cases and conducted from training booklets that the AMS maintains and updates periodically.
Technical assistance experience in Georgia and other transition countries helps identify the appropriate content of training exercises. One form of training program would consist of a basic introduction to the legal and economic principles of antitrust and consumer protection. Practical problem-solving or role-playing exercises using hypotheticals that address transition economy issues have shown the greatest promise as instructional techniques.
For more experienced officials in the AMS and other transition economy competition and consumer protection agencies, there is an acute need for highly practical guidance concerning the application of abstract concepts to antitrust and consumer protection problems. Transition economy officials strongly desire that external advisors provide concrete, operational criteria and methodologies for conducting investigations and making decisions about fundamental analytical issues such as market definition and market power measurement. The key is to design methods that will work in the typical transition economy setting of limited access to government or business records that provide an accurate view of individual markets or the competitive effect of specific practices.
One way to generate a basis for preparing highly practical criteria and operational checklists is to conduct case studies in which foreign advisors and host country officials collaborate to examine specific industries or business phenomena. Case studies can serve a variety of related ends. Collaboration in gathering and analyzing data can facilitate transfers of analytical methods and investigational know-how from foreign experts to transition economy officials, can help foreign advisors assess the analytical capabilities of the host country antimonopoly staff and identify additional needs for training and technical assistance, and can provide guidance about how the host country might best use its investigational and enforcement resources.
It is doubtful that the performance of such case studies and related training and advisory functions will be successful if foreign advisors do not have a long-term presence in the host country and do not have a person with substantial competition policy or consumer protection expertise as part of the long-term, in-country team. The long-term, in-country presence is essential to gain the trust of the host country agency, to enable the foreign advisor to make accurate judgments about local economic and political conditions, and to identify the needs of the antimonopoly agency. Isolated seminars or short-term visits of two to three weeks, by themselves, can have some positive results, but they are inferior to the long-term presence as implementation tools.
2. ORGANIZING THE AMS The AMS devoted substantial effort in its first year of operations to establishing its organizational framework. The basic structure of the agency has been established, and the Service's chief task for the near future will be to implement that structure. Important aspects of the implementation effort include developing bureaus to perform administrative functions such as personnel management; forming-a secretariat that collects and maintains the Service's official records; and establishing an office of public affairs to serve as the focal point of contact with external constituencies.
3. DEVISING PROCEDURES Closely related to building the AMS organizational architecture is the creation of procedures that describe how the agency will function internally and how it will deal with external bodies. A crucial priority for creating internal procedures is to define, for professional staff, the process that the agency will follow in approving the initiation of investigations and authorizing the filing of cases. Important aspects of the agency's external procedures include preparing clear statements of the responsibilities of each office of the AMS and explanations of how citizens or economic agents can bring complaints to the attention of the Service or otherwise make formal requests of the Service.
An additional dimension of process-oriented institution-building is to establish AMS policies that insure that AMS employees execute their responsibilities honorably and that the AMS is perceived externally as a firm but fair champion of the nation's antimonopoly and consumer protection laws. The AMS can supply a valuable prototype for testing restrictions on conflicts of interest and other requirements that diminish opportunities for corruption and build a reputation for administrative integrity.
4. PREPARING GUIDELINES AND PROTOCOLS To inform business managers and their own staffs, new enforcement agencies must develop protocols that identify how public officials will apply the general commands of the antitrust and consumer protection laws. An important focus for future AMS implementation work should consist of developing such guidelines. A valuable dimension of future technical assistance would consist of helping the AMS elaborate the basic framework of the guidelines by developing more specific operational criteria, benchmarks, and checklists for the use of AMS staff members. The development of highly practical operational criteria is likely to require the assistance of an expert who can work for extended periods of time in Georgia with the AMS.
5. CREATING AN INSTITUTIONAL MEMORY Antimonopoly and consumer protection agencies throughout the world must cope with the fact of substantial turnover within the top management tier and the professional staff. Because personnel can change significantly from year to year, it is important to develop internal mechanisms to insure that valuable institutional know-how and expertise do not leave the AMS with every retirement or move to a new job. The AMS has started to create manuals for each office that contain the laws and normative acts entrusted to the AMS, basic organizational data, and other information about the agency. These manuals should be updated regularly and, with additional resources, made available to all AMS employees. Foreign advisors can play a useful role in assisting the AMS in refining the design and content of its operations manual and, perhaps, in obtaining resources to permit the broader distribution of this document within the AMS.
6. OBTAINING ADEQUATE RESOURCEs The most pressing immediate resource need for the AMS is office space. The AMS has been promised its own office in Tbilisi, but no action has been forthcoming from the City of Tbilisi, which must make the required arrangements. Adequate headquarters office space is essential to provide room for routine operations, storage space, and training activities, as well as to sustain morale and establish the Service's independent identity. The AMS also has a desperate need for improved phone, fax, copier, computer capability, and research materials (such as basic antitrust and consumer protection texts) in its headquarters and regional offices, along with an information network that links all offices.
Because the Georgian government is unlikely to appropriate funds for such equipment in the near future, the assistance of foreign donors will be crucial to establishing an adequate physical infrastructure for the AMS. The initial priority is to obtain basic office equipment, including a communications network and information systems hardware and software. Internet access is a valuable tool for transition economy agencies to collect data on business developments and enforcement activities in other countries, and to inform external constituencies about its work. Several transition economy antimonopoly agencies have Web sites and regularly post information about enforcement initiatives and new regulatory developments. Foreign technical assistance budgets also should include a component for acquiring antitrust reference materials, including Georgian translations of important texts.
7. BUILDING EXTERNAL INSTITUTIONs The AMS can increase its effectiveness by enhancing the role of and cooperating with external institutions in building institutional foundations for antimonopoly and competition policy. A first focal point of attention consists of other government bodies with competition and consumer protection responsibilities. In Georgia, the AMS has begun to establish working groups to coordinate activities with government agencies with whom the Service shares responsibility for devising and executing antitrust and consumer protection policy. The AMS also is developing ties with foreign competition bodies, including transition economy antimonopoly authorities, multinational organizations such as the OECD, and Western competition agencies.
Consumer groups and other nongovernment organizations also will play an important role in implementing competition policy, both in enforcing the law directly (through private suits under the antimonopoly and consumer protection laws) and in disseminating information about the laws. The AMS should develop liaison arrangements with these bodies to coordinate enforcement plans and to carry out education and publicity activities.
University departments that teach law, business, economics, and public administration will be important sources of future employees to the AMS and of ideas about antimonopoly and consumer protection policy. The AMS should seek to build relationships with the academic community to recruit promising students and to encourage academics to undertake research projects useful to the antimonopoly and consumer protection community in Georgia. The AMS could help universities develop curricula to teach courses dealing with the role of competition and consumer protection policy in market processes.
Finally, Georgia's antimonopoly and consumer protection laws confer important duties on the country's courts. Article 29 of the antimonopoly law permits private parties to bring suits in the courts for damages arising from violations of the law and allows appeals in the courts from decisions of the AMS. In deciding private enforcement actions and hearing appeals from AMS decisions, the courts will influence the interpretation and impact of the antimonopoly law's substantive commands and remedial provisions. Unless judges have a basic familiarity with the principles of market economics and competition policy, their interpretations of the antimonopoly law will be seriously prone to error. Faulty or confusing judicial interpretations of the law will seriously retard the development of an effective competition policy in Georgia.
The judiciary's participation in the application of the consumer protection law is equally significant. Article 30 of the consumer protection law authorizes the AMS to remedy violations of the statute by bringing suits in the courts of Georgia, and article 34 permits consumer associations to sue on behalf of consumers in the courts. Article 12 of the consumer protection law also might be interpreted to give individual consumers direct assess to the courts to remedy breaches of contract. Suits filed under any of these provisions will require Georgian judges to make difficult judgments about the purposes and effects of product quality standards, information disclosure requirements, and delivery guarantees. Unless informed by a basic understanding of contract and consumer protection law, judicial decisionmaking in this area will be counterproductive.
A training program for judges in antimonopoly law and consumer protection would provide seminars on the essentials of market economics and an introduction to the fundamental principles of competition and consumer protection policy. Such seminars could consist of a mix of lectures and practical exercises in which the judges discuss how specific competition problems might be resolved under the antimonopoly law. The antimonopoly training program could be part of a larger effort to acquaint Georgia's judges with analytical techniques that will be important to the development of commercial law jurisprudence and the application of market-oriented law reforms involving such matters as bankruptcy, contracts, environmental regulation, intellectual property, property, secured transactions, and securities regulation.
There are several possible approaches for carrying out the training activities for judges. Antimonopoly training could be funded by donors as a stand-alone program or carried out in conjunction with existing judicial training activities, such as those organized by the Central and Eastern European Law Initiative of the American Bar Association. The AMS would not be responsible for organizing and funding the training for judges. Such training is sure to require donor funding, and the training exercises might not be perceived as impartial if they were designed and executed by the body (the AMS) whose decisions later might be reviewed by judges who attended the training workshops. Because they constitute the country's premier source of competition policy expertise, AMS officials nonetheless should be invited to participate as speakers and instructors at the seminars. In October and December of 1997, CEPAR conducted successful week-long programs for judges that included lectures by AMS officials and foreign experts, as well as a simulated antitrust trial.
B. A suggested program of education and publicity
The second goal of early AMS implementation efforts is to educate external constituencies about the content and purposes of Georgia's antimonopoly and consumer protection laws and to publicize the Service's activities. The education and publicity program will help acquaint Georgians with the principles of antimonopoly and consumer protection law and familiarize them with the function and operations of the AMS. Among other results, the education and publicity program should foster a perception that the AMS is Georgia's preeminent champion for competition as the organizing principle of the Georgian economy and the country's foremost voice for consumer interests.
The education and publicity program should have several specific elements. One is publishing booklets and brochures that describe the activities of the AMS and explain its powers. These should be targeted at all of the agency's external constituencies. A second is a continuation of AMS efforts to appear in mass media forums. A third is a regular program of cooperation with business groups, consumer groups, and other nongovernment bodies to explain the work of the AMS. A fourth is to regularly inform members of Parliament and other government bodies about the Service's activities.
C. Antimonopoly and consumer protection enforcement
The third objective for near-term implementation is to continue its efforts to develop and execute a general strategy for enforcing the substantive commands entrusted to the AMS by the antimonopoly and consumer protection laws. The AMS should relate its enforcement activities to general themes that convey to external constituencies a coherent vision of what economic ends the Service desires to achieve in applying its antimonopoly and consumer protection authority. One way to identify these general themes is to perform the following exercise. Assume that someone asks the AMS to explain why Georgia should have an antimonopoly law, or to define what the Service is trying to accomplish. Such questions will arise regularly when the AMS deals with members of Parliament, business enterprises, ministries, consumer groups, and other constituencies. It is essential for the AMS to present convincing answers to such basic questions about the rationale for antimonopoly and consumer protection enforcement and the enforcement strategy of the Service.
1. GENERAL THEMES A key aim of early AMS enforcement has been, and should remain, is to remove artificial obstacles to entry by new entrepreneurs, particularly where government bodies establish such obstacles. The rationale for giving priority to publicly-imposed entry barriers is that such impediments usually are considerably more durable and insurmountable than entry barriers created by purely private action, particularly in transition economies. Major elements of an entry-facilitating program would include advocacy and enforcement efforts to prevent government ministries from imposing unjustified restrictions on entry and giving discriminatory advantages to incumbent state-owned firms. As described below, the AMS and its predecessor (the Antimonopoly Department) already have achieved a number of successes in performing this role.
A strong program to eliminate government practices that suppress competition will have several advantages. First, because government intervention is the greatest source of trade restraints in Georgia, expenditures on challenging publicly-imposed entry barriers promise to yield the greatest benefits in increasing competition and improving consumer well-being. Second, AMS opposition to government interference with market processes can help gain private sector support and establish the Service's credibility when it seeks the cooperation of the business community in obtaining voluntary compliance with the antimonopoly and consumer protection laws. Third, AMS efforts to dismantle government barriers to competition coincide most closely with what foreign donors believe to be the best form of competition and consumer protection policy in transition economies. Such initiatives are most likely to elicit donor support for activities (such as investments in training, office equipment, and publications) that are needed to increase the Service's effectiveness.
Since 1992, Georgia's antimonopoly authorities have pursued a number of initiatives that oppose publicly-imposed impediments to entry and other distortions in the market process. In one matter the AMS succeeded in overturning a decision by the Cabinet of Ministers to designate one firm as the exclusive supplier of insurance to firms that are required to purchase insurance as a condition of carrying out certain import activities. The decision preserved opportunities for other insurance companies (including foreign firms) to compete in this market. In a second case, the AMS successfully opposed efforts by government officials in Tbilisi to restrict a small bakery to making sales in selected areas of the city. AMS intervention permitted the bakery to compete for sales in other areas of the city.
Privatization programs can raise a number of competition policy concerns. For some sectors subject to state ownership, it may be possible to structure privatization plans to establish viable competing firms rather than simply sustaining organizational structures that combined all productive activity in one enterprise. The AMS can play a useful role by advocating consideration and implementation of privatization solutions that maximize opportunities for competition in the post-privatization period. The AMS presently interprets article 14 of Georgia's antimonopoly law to allow the Service to bar the registration of privatized firms that have anticompetitive characteristics.
Where privatization yields competing entities in a given sector, the newly established private firms may seek through mergers or the formation of holding companies to re-create the unified organizational structure that prevailed under state ownership. Some consolidation ordinarily will be desirable and efficiency enhancing, as firms seek to eliminate redundant capacity and realize economies of scale and scope. Nonetheless, AMS scrutiny of mergers will be appropriate to insure that proposed consolidations do not reestablish monopolies, such as holding companies that control all producers in the relevant market.(8) The possibilities for mergers to create or reinforce market power will be greatest in services and other nontradable sectors in which imports, even in a liberalized trade regime, do not supply an effective competitive constraint.
In choosing enforcement targets, the AMS might focus on economic activities where increased competition in one sector generates large economic benefits by stimulating growth in a number of other sectors that consume large amounts of the inputs generated by the first sector. Major examples would include the transportation, financial services, and communications. Increased competition in these areas would improve the functioning of networks that are crucial to economic growth. For example, by lowering the costs of moving goods across Georgia, increased competition in the transportation sector can reduce the delivered prices of many goods and make previously insulated geographic markets contestable by distant sources of supply.
Especially in the early stages of its operations, the AMS should seek to increase the ability of consumers to discipline market participants by insuring the flow of truthful information about products and services. The AMS could achieve this in various ways that do not require recourse to compulsory enforcement techniques. One method is to develop programs for informing consumers about how adjustments in buyer patronage motivate suppliers. Simple forms of education can help consumers understand the market mechanism and appreciate how their purchasing behavior can press suppliers to satisfy their preferences more closely. A second approach is to work with business operators to devise voluntary guidelines for truthful advertising. These and other strategies can contribute substantially in transition economies toward building consumer confidence in markets. Establishing an environment in which consumers trust supplier representations about products and services is central to this process.
The possibilities outlined above are not exhaustive. The AMS could highlight these or other unifying themes in its promotional activities and could explain how individual enforcement initiatives serve to accomplish these objectives. The articulation of unifying enforcement objectives can help guide the Service's allocation of resources and selection of initiatives. Such an approach also can help demonstrate to external constituencies that the AMS has a coherent vision. By identifying its enforcement objectives and reinforcing them regularly through educational and publicity activities, the AMS can establish a clear public understanding of its purposes and accomplishments.
2. INSTRUMENTS OF ENFORCEMENT POLICY The AMS has a number of tools at its disposal for obtaining compliance with the antimonopoly and consumer protection laws. The term "enforcement" sometimes connotes the prosecution of cases in the courts. This conception is too narrow to be useful to the AMS. In speaking of "'enforcement," the Action Plan anticipates that the Service will use the full panoply of policymaking devices to correct existing violations, encourage future compliance, and otherwise accomplish the objectives of the competition and consumer protection statutes.
The portfolio of AMS enforcement efforts in the next few years should include several activities. Georgia's antimonopoly law gives the AMS a broad charter to conduct studies concerning individual sectors of the Georgian economy and bring "proposals promoting the development of competition and the reduction of monopolistic activities to the attention of the appropriate organs" (art. 20.h). Performing studies can enable the AMS to accomplish several institutional and substantive objectives. In terms of institution-building, the process of conducting a study--reading the relevant literature, gathering and analyzing data, and interviewing informed observers--can help the AMS staff learn the conceptual framework of antimonopoly and consumer protection policy, develop valuable experience in applying the conceptual framework to the facts of specific industries, and acquire a useful understanding of business sectors and public policies that will be recurring areas of AMS concern. In terms of substance, publication of carefully prepared studies can be a valuable means for drawing attention to and stimulating the correction of market failures and for establishing the Service's reputation as a knowledgeable authority on competition and consumer protection policy and an astute student of the Georgian economy.
For the first year, the AMS should emphasize efforts to encourage business enterprises and government entities to voluntarily abandon practices that violate Georgia's antimonopoly and consumer protection laws. In its education and publicity activities, the AMS should indicate its awareness that the 1996 legislation represents a new direction for economic policy in Georgia, and that a necessary step in applying the new legislation is to inform business and government officials about the requirements of the new law and give them an appropriate opportunity to change behavior that contradicts the laws.
The AMS may be able to reach agreements with specific government bodies or business enterprises to discontinue illegal acts and adopt procedures for insuring future compliance with the law. Western antimonopoly and consumer protection agencies routinely accept consent decrees by which economic agents commit themselves in writing to cease specific forms of conduct and otherwise adjust their behavior. Through such agreements, the antimonopoly enforcement agency and the economic agents correct violations of the law while avoiding the cost of an extensive court proceeding. The agreements are made public to encourage voluntary efforts by economic agents to obey the law, to deter future violations by demonstrating the antimonopoly agency's commitment to address illegal conduct, and to provide tangible proof to external observers that the agency has an active program to identify and challenge improper behavior.
The next few years of AMS enforcement activity also should feature the limited use of compulsory enforcement techniques to stop clear violations of the law and to demonstrate the Service's willingness to use compulsory methods where voluntary compliance is not forthcoming or effective. Early cases should involve clear-cut violations of the law where the likelihood of prevailing in court is high. If possible, initial cases might challenge violations involving frequently purchased consumer goods to permit the AMS to increase public awareness of its mission and to demonstrate the benefits of competition and consumer protection.
In the past 20 years, Western nations and donor organizations have encouraged the establishment of new competition policy and consumer protection programs in countries that once relied entirely or mainly on central government controls to organize economic activity. Since the late 1970s, some forty transition countries have created new antitrust or consumer protection systems. The attention devoted to the formation of these new mechanisms has obscured the grave problems that transition countries such as Georgia must solve to implement the new legal commands. The success of the new competition and consumer protection experiments requires a stronger commitment by Western nations and international donor organizations to support implementation strategies that develop institutional capability and sound enforcement programs in conditions of extreme resource austerity and fragile political support. This article suggests how Georgia and other transition economies can address implementation issues whose resolution will determine whether the massive effort to draft and enact new laws was worth the effort.
(1) See Mark R.A. Palim, The Worldwide Growth of Competition Law: An Empirical Analysis, in this issue of The Antitrust Bulletin (discussing the development of new antitrust systems in transition economies).
(2) See William E. Kovacic, Getting Started: Creating New Competition Policy Institutions in Transition Economies, 23 BROOKLYN J. INT'L L. 403, 417-29 (1997) (discussing obstacles to implementing antitrust laws in transition countries); Armando Rodriguez & Mark D. Williams, Recent Decisions by the Venezuelan and Peruvian Competition Agencies: Lessons for Harmonization, in this issue of The Antitrust Bulletin (discussing experiences of competition authorities in Peru and Venezuela).
(3) See Decree of the Republic of Georgia State Council, On Restricting Monopoly Activity and Developing Competition (Sept. 12, 1992). An earlier measure, Government Resolution No. 321 (Mar. 17, 1992), had called for demonopolizing Georgia's economy.
(4) The origins and content of Russia's antimonopoly law are described in Vladimir Capelik & Ben Slay, Antimonopoly Policy and Monopoly Regulation in Russia, in DE-MONOPOLIZATION AND COMPETITION POLICY IN POST-COMMUNIST ECONOMIES 57 (Ben Slay ed., 1996).
(5) Presidential Decree No. 249 of December 28, 1996.
(6) Article 12 states: "Consumer rights envisaged by the [consumer protection] legislation are protected by the court. A suit can be brought to the court in accordance with the rules defined by the Civil Process legislation."
(7) Compare WILLIAM E. KOVACIC & BEN SLAY, RECOMMENDED GUIDELINES FOR IMPLEMENTING GEORGIA'S ANTIMONOPOLY AND CONSUMER PROTECTION LAWS (Center for Economic Policy and Reform, Analytical Report No. 8, Apr. 1997) (proposing guidelines concerning market definition and market power measurement, natural monopolies, monopolistic pricing, and consumer protection).
(8) In several cases the AMS has opposed efforts by government agencies to cartelize specific industry sectors by merging all industry participants into single holding companies or forcing such participants to operate under the supervision of quasi-government trade associations.
AUTHORS' NOTE: This article is based in part on William E. Kovacic, A Recommended Action Plan for Implementing Antimonopoly and Consumer Protection Policy in Georgia (Center for Economic Policy and Reform: Analytical Report No. 9, May 1997). The authors are grateful to Georges Korsun, Robert LaMont, Larry Morgan, and Malcolm Russell-Einhorn for many useful comments and suggestions.
WILLIAM E. KOVACIC, Professor, George Mason University School of Law.
BEN SLAY, Assistant Professor of Economics, Middlebur College.
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|Title Annotation:||International Competition Policy|
|Author:||Kovacic, William E.; Slay, Ben|
|Date:||Mar 22, 1998|
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