Refining the SAR Advantage: More Efficient Markets

By Jane Lee

Hong Kong is a free market economy but in so far as efficiency is concerned, there are always rooms for further improvement. In the traditional economy, an efficient market is ideally achieved under a perfect market structure, which permits the freedom of entry and exit. Increasingly, we are moving towards a servicing economy, and we have a lot of non-tradable sectors. The international trend is to shift the regulatory approach to one based on competition policy.

Discussions in Session D concentrated on the arguments on the desirability of having a competition law. Prof SK Tsang of the Hong Kong Baptist University pointed out that although the tradable sectors in Hong Kong were very free, there was still a lot of inefficiency in the non-tradable sectors such as education and healthcare and medical services. As the Hong Kong market was too small, it was easy for dominant players to engage in anti-competitive behaviour. The world trend was to shift from regulation to deregulation, but such approach could not work well without a comprehensive competition policy. For instance, among the top ten freest economies ranked in the 2001 Heritage Foundation report, six of them have implemented comprehensive competition policies. Also, according to the World Trade Organization, more than 80 countries, which represented 86% of the total world trade, have adopted various kinds of competition law. Prof Tsang emphasized that the objective of implementing a competition law was to introduce a set of rules on acceptable conduct. He also suggested establishing a ‘Fair Competition Council’ in Hong Kong, which would formulate the appropriate choices for us.

Some participants supported the implementation of a competition law. Edwin Lai, for example, commented that price fixing was not an illegal practice in Hong Kong if firms could arrive at an agreement among themselves. Anti-competitive behavior did exist in specific business sectors. For instance, a few oil companies dominated the petrol servicing industry and their operations lacked transparency. In other cases, large real estate developers dominated the operation of supermarket and mobile telephone services through their own subsidiaries in their own properties. Under these circumstances, a comprehensive regulatory approach seemed to be appropriate.

Ultimately, what was the objective of attaining market efficiency? From a layman’s point of view, consumers’ interest was more relevant. We should therefore ensure that consumers’ benefits and choice were protected.

Others felt that we should be careful in considering the means of managing market inefficiency. Economist KC Kwok believed that monopolistic power was very difficult to sustain because new ideas would quickly emerge. Innovation and imagination would create new markets. Moreover the rapid development of technology had blurred the market and sector-specific boundaries. Technological breakthroughs allowed more market players to enter into the markets and monopolies could not sustain for too long. The telecommunications industry was a good example.

We should carefully differentiate competition policy from competition law and competition authority. It was not disputed that Hong Kong should adopt a pro-competitive policy, but if one sets it down in the laws, we would have administrative bodies responsible for enforcing the laws, thereby imposing more bureaucratic procedure on business services. Shih Wing-ching complained that his business had been charged at an unreasonably high rent level in a large shopping mall controlled by a developer. Even so, he did not prefer any bureaucratic and administrative bodies to enforce any law. He was worried that once a body was set up, the cost would multiply and would not be unjustified. Sandra Lee of the Economic Services Bureau stressed that in considering competition we also need to look at the optimal economy of scale, particularly in a compact economy like Hong Kong. We should be careful not to over-regulate and deter new players from entering into the market. A comprehensive competition law would stifle entry points for certain sectors. Others echoed the worry that once competition law was in place, it would cause more inefficiency in the market. Eventually consumers would not benefit.

KC Kwong raised a philosophical aspect that the most critical question was whether the goods and services provided in the markets were inefficient, and whether there was any empirical evidence showing that the markets in Hong Kong were inefficient. Cherry Ling echoed by arguing that a competition policy was essential, but not a competition law. Advocating a result-oriented perspective, she considered that the markets in Hong Kong actually functioned quite well. Others however believed that the process was as important as the result. People wanted some form of regulation because consumers should be protected and transparency was regarded as important in the process.

When it came to the point of protecting consumers’ interest, participants seemed to agree that we should do more to remove the barrier of entry and censure anti-competitive practices. Not all supported a competition law or a competition authority, but we supported in principle further market liberalization, reduction of barrier to entry, reduction of regulations and protection of the consumer.

Apart from issues of competition policy and competition law, we would need to consider deregulating the non-tradable sectors, which had a lot of inefficiency. But as far as consumers’ interest was concerned, we should implement deregulation very carefully. Unless the foundation for deregulation was ready, the object of consumer protection might not be achieved.

In the field of higher education, for example, it was supply-determined. The universities dominated the supply of faculties, teachers, as well as courses. Students were asked to rank their preferred faculties and subjects. However, many of the students in fact ended up studying something which was not their preference and which was not very useful in their careers. There was inadequate market forces to discipline the universities in terms of responding to consumer needs.

In case of the medical and healthcare services, EK Yeoh pointed out a phenomenon in which the economists referred to as ‘information asymmetry’, that is doctors knew what services they provided but the patients often did not know what they wanted to buy. In order to enhance market efficiency, information was the most important factor. Therefore, government should be careful in liberalizing such kind of services. Government should ensure that consumers would get value for money and obtain a high standard of service at an affordable price.

We should beware not to liberalize the market prematurely, otherwise we could end up in a worse situation. A policy to encourage competition in terms of price was not necessarily the right way forward. The case of the construction industry was a good example. As the biggest buyer of construction services, the government principally looked for the cheapest price in the tendering exercises. Therefore the construction companies competed for the contracts at the lowest price. As KC Kwok illustrated, this industry was quite disintegrated and the culture adversarial. People knew full well that the important thing was to get the contract at the lowest price because all sorts of dubious things could be done afterwards. Therefore the Housing Authority had to reform the relationship with its contractors, so as to benefit the consumers and the end-users.

Deregulating social welfare service was another example. In the past the government gave social welfare agencies subsidies but with a lot of rigid guidelines and regulations attached. Welfare agencies had almost no freedom to distribute resources internally in accordance with changing social aspirations and needs. Now the government intended to relax control over welfare agencies, yet mutual trust between the two sides was not fully established. Moreover welfare agencies had inadequate management expertise and confidence in managing such change. As a result, many welfare workers strongly opposed to the policy change, although the latter was in line with the direction of deregulation and encouraging welfare services to respond to market need more efficiently.

We should therefore be aware that more competition did not necessarily lead to more efficient markets. Market efficiency might not be achieved if the foundation was not ready.

Finally, seeking policy change could be a high sounding idea, but it might not necessarily work. We should ensure that we were not setting up a set of rules and regulations to penalize success. We should always be reminded that Hong Kong should maintain itself as a free market economy and an attractive place for foreign investment.