Dynamism Down Under: Lessons From Competition Reform - Speech

SPEECH

DYNAMISM DOWN UNDER: LESSONS FROM COMPETITION REFORM*

Asian Development Bank Competition Policy Dialogues, Manila, Philippines
Tuesday 23 July 2024

Members and guests of the Asian Development Bank, thank you for the welcome. It’s an honour to be here representing the Australian Government.

Australia is a founding member of the Asian Development Bank and we continue to support joint efforts to respond to the needs of the region and deliver transformative development projects (ADB 2024, Wong 2024).

As part of that commitment, Australia supports initiatives to share expertise across a range of areas and I thank the Bank and the Philippines for hosting today’s Competition Policy Dialogues.

Earlier this year, His Excellency President Marcos Jr. gave a special address to the Parliament of Australia where he spoke about the spirit of bayanihan and mateship between Australia and the Philippines (Marcos 2024).

Building on that spirit – and nearly 80 years of diplomatic relations – our governments committed to a new Strategic Partnership to further strengthen our ties (Albanese 2023).

And when it comes to competition regulation, the Philippine Competition Commission and the Australian Competition and Consumer Commission have recently signed their own Memorandum of Understanding to increase cooperation (ACCC 2024). The Memorandum of Understanding builds on technical assistance that the Australian Competition and Consumer Commission has provided to the Philippines under our free trade agreement with the Association of South East Asian Nations.

The Philippine Competition Commission was established in 2016 as a part of long-awaited competition reforms and part of a wider spread of competition law across the region (Ravago & others 2022).

With the support of the Asian Development Bank, the Philippines has worked to build capability in competition law (ADB 2019).

And as Arsenio M. Balisacan, Secretary of the National Economic and Development Authority and former chair of the Philippine Competition Commission, points out, it has also worked to ensure competition policy is mainstream when it comes to the nation’s development agenda (Balisacan & Papa 2020).

So, I was delighted to accept your invitation to talk about one of my favourite topics and also one of the most crucial areas of our economies: competition policy.

Competition is a powerful equaliser

Whether it’s Manila or Melbourne, competition provides consumers with more choices, allowing people to shop around and find better value products and services.

Genuine competition between businesses also provides greater opportunities for workers to switch jobs, allowing them to make the most of their skills and secure better pay and conditions.

In a competitive market, less efficient firms exit, and innovators bring new products and services without fear of entrenched monopolists shutting them down.

Competition is also a powerful tool for economic development. The World Bank reviewed a series of studies from developed and developing nations and found competition policy reforms can deliver benefits for the poorest households and improve income distribution (Begazo and Nyman 2016).

The benefits of competition are broad, but there is no template or one-size-fits-all approach to reform. Nor should there be. All economies have different strengthens and weaknesses and governments will always have their own ideas. 

I’m not saying Australia always gets it right – like many countries, we face our share of competition challenges. But today’s dialogue provides a great opportunity to share some policy insights on dynamism Down Under and some of the lessons we’ve learnt. I will also set out our current competition reform agenda.

Lesson 1: Competition and economic dynamism go hand-in-hand

The first lesson – made clear in a recent Australian Parliamentary report chaired by my economist colleague Daniel Mulino – is that competition and economic dynamism are complementary (Mulino 2024).

You can’t have one without the other. Productivity growth – a key driver of living standards over the long term – suffers when our economies are less competitive and less dynamic.

In the words of the Australian Treasury, ‘Dynamism refers to innovation, adaptation, and growth within an economy’ (Treasury 2023). Dynamism ‘reflects the ability to generate new business opportunities, efficiently allocate resources and adapt to changing circumstances’.

The concern back home is that Australia’s productivity growth has slowed over the past decade. Reduced competition has contributed to this trend with evidence of increased market concentration, a rise in markups and a reduction in dynamism across many parts of the economy (Chalmers & Leigh 2023).

Australian consumers don’t have to look far to see the dangers of monopoly power (Leigh 2024). Whether it’s mobile phone carriers, supermarkets, health insurers or banks, often there are only a few choices. Those who live in regional areas have even fewer options.

In one study, economists Dan Andrews and Elyse Dwyer compared the market share of the top four companies in Australia and the United States across 17 comparable industries (Andrews & Dwyer 2023). In all but one industry, Australia’s markets were more concentrated than those in the US.

A common response is ‘Well, what do you expect in a country with fewer than 30 million people?’ You might expect that when a country grows larger, its markets will become more competitive. Yet the trend has been in the opposite direction.

The Parliamentary Report I mentioned earlier said ‘if we don’t improve the level of competition and dynamism within our economy, today’s consumers will get a raw deal, while future generations will be far poorer than they might have been’ (Mulino 2024).

Many countries around the world find themselves at a similar crossroad but we recognise ‘Australia needs to lift its game when it comes to both competition and economic dynamism’ (Mulino 2024).

Lesson 2: Competition reform can improve living standards, but it’s no easy task.

The second lesson is that competition reforms are a proven way to make the economy zippier and improve living standards. But history shows it is no easy task.

Economic reforms in the 1980s opened the Australian economy to international competition: bringing down tariff walls to make goods cheaper and force local businesses to compete against the best in the world (Leigh 2024).

But many areas of the domestic economy faced minimal competitive pressure. Sectors such as transport, electricity, water and telecommunications were still relatively untouched by competitive forces.

In the 1990s, the Hilmer Review’s recommendations for big, bold and far-reaching reforms were handed to the government (Leigh 2022). Indeed, we’re still talking about the Hilmer Review and the National Competition Policy reforms today because they are still regarded among the most significant economic reforms in Australia’s history.

The big idea was that competition was the key to ensuring that economic reform delivered for regular Australians. But it took serious commitment and work over several years to bring a big dose of competition to the Australian economy.

Different tiers of governments – federal, state and territory – had to work cooperatively towards a common goal.

Around 1,800 laws and regulations that restricted competition were reviewed and, where appropriate, reformed. Among other things, this led to the deregulation of retail trading hours in most jurisdictions and the end of various price-setting agricultural marketing boards.

Retail energy markets were opened to competition enabling consumers to shop around for the first time.

Government businesses were restructured to operate more efficiently and there were some major privatisations.

And competition laws were extended to previously excluded businesses to level the playing field.

But the effort across all these areas was well worth it.

In its 2005 review of the National Competition Policy reforms, the Productivity Commission – Australia’s independent research and economic advisory body – analysed the impact of the reforms on the Australian economy (Productivity Commission 2005).

It estimated a permanent increase of 2.5 per cent in Australia’s GDP from the competition reforms. Today, that lift equates to around A$50 billion a year, or around A$5,000 per household.

Lesson 3: Competition is a productivity growth strategy and requires a full toolbox of solutions

The third lesson – and it is fair to say we are in the middle of it in Australia – is that competition is a productivity growth strategy that requires a full toolbox of solutions.

The Australian Department of Treasury and the Reserve Bank of Australia’s analysis found that even just returning competition to levels Australia experienced in the early 2000s would lift GDP by between 1 per cent and 3 per cent (Chalmers 2024).

We know the challenges are different from what they were in the 1990s, but our competition agenda has the same ambition as the Hilmer reforms: to make our economy more competitive, more dynamic and improve living standards.

Let me set out what we’ve announced as part of our competition reform agenda in our first two years of government.

Revitalised National Competition Policy

We are revitalising National Competition Policy.

Australia has a federated model. We have a national government – of which I’m a member – and individual states and territories have their own governments.

National Competition Policy puts all those governments on the same page. That’s important as laws and policies at all levels of government can impact competition.

We have made solid progress with governments seeking to agree on new competition principles by the end of the year.

All governments are committed to developing an agenda of long‑term pro‑competitive reforms.

To support this work, the Productivity Commission is undertaking a study to assess the economic and revenue impacts of potential competition reforms.

Competition Taskforce building an evidence base

Last year, the Australian Government established a Competition Taskforce in the Australian Treasury. It’s a crack team of competition experts, including economist and lawyers, working to advise us on whether our competition laws and policies are fit for purpose.

The Taskforce is not only using data to build an evidence base to inform immediate competition policy reforms, but it is investing in new data assets to support competition decisions into the future.

The ability to analyse large datasets to understand the challenges and craft solutions is a game changer compared to 30 years ago. We’re not just debating theory, we’re producing new facts that can inform policy.

Improving the mergers system

The Competition Taskforce has been focused on improving Australia’s system for scrutinising potentially anti-competitive mergers.

It conducted a public consultation where stakeholders said the current ‘ad hoc’ merger process is unfit for a modern economy, lagging best practice in comparable countries.

First, Australia is an outlier in not requiring merger notification. Almost every advanced country, has a system that requires the compulsory notification of mergers.

An example of the data analysis I mentioned before is that the Competition Taskforce analysed business microdata to estimate that  around 1,400 mergers take place annually. It may surprise you to know that this was the first time that anyone had produced a definitive estimate of the number of Australian mergers.

The analysis matters because the Australian Competition and Consumer Commission only sees around 300 of these mergers. So, three out of four mergers fly under the regulatory radar.

Second, Australia’s current approach to merger control has no less than three pathways to seek a review, which can contribute to confusion and delays and can create an opportunity for strategic behaviour to avoid detection.

And third, for the most part, our system is not transparent. Only a fraction of mergers reviewed by the Australian Competition and Consumer Commission every year are done so publicly.

That’s why we have announced reforms to make Australia’s merger approval system faster, stronger, simpler, more targeted and more transparent.

Australia will – like the Philippines – introduce a mandatory and suspensory administrative merger control system.

Where the Australian Competition and Consumer Commission considers that a merger poses no threat to competition – which is most mergers – approvals will be provided within 30 working days.

We are legislating a mandatory notification system and empowering the Australian Competition and Consumer Commission as the single decision maker on all mergers that meet the notification thresholds.

Mergers above monetary and market share thresholds will need to be notified to the Australian Competition and Consumer Commission to be approved before proceeding. We will set the thresholds based on international practice and through consultation (Chalmers 2024).

We are reducing three merger review streams to a single, streamlined path to approval that removes duplication and standardises notification requirements for all mergers.

Mergers that create, strengthen or entrench substantial market power will be identified and stopped while those consistent with our national economic interest will be fast tracked.

Finally, the merger system will be more transparent, by ensuring the community – consumers, businesses and the public – has better visibility of merger activity.

There will be a public register of all mergers and acquisitions notified to the Australian Competition and Consumer Commission to promote transparency and accountability.

Reviews of the Australian Competition and Consumer Commission’s decisions will be the responsibility of the Australian Competition Tribunal, made up of a Federal Court judge, an economist and a business leader – all with knowledge or experience in industry, commerce, economics, law or public administration.

We will finalise the details in advance of the new merger system beginning from 1 January 2026.

The Philippines experience – reviews of over 200 mergers since introduction in 2016 and interventions with remedies and prohibitions in five transactions – has shown the benefit of having a framework that allows the authority to review transactions that potentially have long-term, anti-competitive effects and prevent them from taking place. These were mergers that would otherwise have caused structural harm to the Philippines economy (OECD 2023).

Examining non-compete clauses

We also asked the Competition Taskforce to examine non-compete clauses and their impact on competition and economic dynamism.

As the name implies, non‑compete clauses restrict employees from working for a competitor or setting up a competing business when they leave.

Written into employment contracts, they typically apply for a certain time, in a set geographic location, and within a defined industry.

For example, a Manila tech company may require its new coders to sign an agreement restricting them from working for a competitor or starting their own business in Manila for two years after resigning.

Businesses around the world have used these types of clauses to help protect their trade secrets, confidential information and customer lists for decades.

However, a growing body of evidence internationally suggests the increasing use of non‑compete clauses is a drag on job mobility, innovation and wages growth.

To better understand the use and prevalence in Australia, the government’s statistical agency recently conducted its first survey on the use of restraint clauses by employers.

The Australian Bureau of Statistics survey found 1 in 5 Australian businesses used non‑compete clauses for at least some of their employees in 2023 (ABS 2024).

We also know that restraint clauses – including non‑competes – are being applied to workers of varying incomes including hairdressers, early childhood workers and security guards.

Once upon a time, only the best‑paid corporate executives were required to spend a period of ‘gardening leave’ between jobs. Now, gardeners are being forced to take gardening leave.

We have seen a trend of overseas jurisdictions proposing or taking action to restrict the use of non-compete clauses.

In April this year, the United States Federal Trade Commission announced a new rule that will ban non-compete clauses across the country. The Federal Trade Commission estimates that this will increase average annual wages by US$500 and lead to the creation of over 8,000 additional businesses (FTC 2024). While the Federal Trade Commission ruling is subject to legal challenges, this development follows a broader trend across states of banning or limiting the use of employee non-competes.

To gather views on the topic, we released an issues paper at the start of this year and invited interested parties to express their views (Treasury 2024a). That public consultation process recently concluded, and we will announce the way forward in coming months. We will take a measured approach, informed by evidence and stakeholder feedback.

Making the supermarket sector as competitive as possible

Our approach to competition reform also involves making sure supermarkets are as competitive as possible. Australia’s supermarket sector is highly concentrated, with the largest three grocery chains having a combined market share of 75 per cent.

First, we commissioned an independent review of the voluntary Food and Grocery Code of Conduct.

The Code was introduced in 2015 to help address an imbalance in bargaining power between supermarkets and their suppliers (Treasury 2024b).

The final report of the independent review recommended a stronger, mandatory Code, with the four major supermarkets being subject to a range of obligations and multi-million dollar penalties for serious breaches of the Code (Treasury 2024c).

The Government accepted all the recommendations of the independent review (Treasury 2024d).

The mandatory Code will ensure greater protections against retribution, a new whistle-blower channel to the competition enforcer, new protections for fresh produce suppliers, and a range of options for dispute resolution.

Together, this will improve the bargaining position of suppliers to ensure a sustainable supermarket sector.

Second, we’ve asked the Australian Competition and Consumer Commission to conduct an inquiry into Australia’s supermarket sector – the first of its kind in sixteen years (Albanese, Chalmers & Leigh 2024).

This includes examining the pricing practices of the supermarkets and the factors influencing prices along the supply chain.

The Australian Competition and Consumer Commission will provide us with their interim findings next month.

Third, the Government provided funding to a respected consumer group, CHOICE, to provide price transparency and comparison reports on a quarterly basis for three years (Engel & Rafferty 2024). Information is power, and we’re putting that information into the hands of consumers.

The June report showed substantial price differences between grocery chains, with gaps of up to 25 per cent between supermarkets.

This kind of information is a public good, but a membership-based organisation such as CHOICE cannot be expected to provide the reports from its undercover shopping exercises to the public without charging. By funding CHOICE to provide shoppers with price information, we help level the playing field between producers and consumers.

Lesson 4: Consider the competition aspects of technological change, including artificial intelligence.

My fourth and final lesson is around adapting to change.

Governments and regulators need to take a balanced view when considering the competition aspects of technological change.

And there’s no bigger – or more rapid – technological change in terms of opportunities and challenges than artificial intelligence.

Past general-purpose technologies like electricity and the steam engine took time to affect our lives.

But the rise of AI engines has been nothing short of remarkable.

To reach 100 million users, the telephone took 75 years. The mobile phone took 16 years. The web took 7 years. Facebook took 4 years. Instagram took 3 years (Song 2019).

ChatGPT took just two months (Duarte 2023).

AI offers the potential for massive economic gains, especially following an era of languishing productivity and worsening inequality (Leigh 2023).

From customer support to computer programming, education to law, there is massive potential for artificial intelligence to make people more effective at their jobs.

AI also has the potential to reduce barriers to entry for new firms and help small firms scale-up faster. And if all firms have access to similar quality AI, it can have a democratising effect on the economy, potentially boosting dynamism.

But it’s not all upside.

With AI having huge potential to transform our society and economy, it’s critical to be considering its competitive aspects.

In a speech and subsequent paper published in Competition Policy International’s TechREG Chronicle, I identified five challenges artificial intelligence poses for competition (Leigh 2023).

The first is costly chips. Computing power, including the development of artificial intelligence systems, relies on access to currently costly and scarce semiconductor chips. So strategies to ‘build a competition moat’ around AI chips should be questioned (Clark 2023).

Private or restricted data is the second challenge. We know the best AI models are those that are trained on the highest quality and greatest volume of data. But what happens when the data taps are turned off? A lack of data access could potentially push the AI market towards a less competitive outcomes.

Third is network effects – where people gravitate towards the biggest and most popular networks. In the AI context, this could fuel market power, entrenching the position of the strongest platforms.

The fourth challenge is immobile talent. For example, the next AI startup may struggle to get the requisite chips and data, but also to hire the right workers. Companies investing most in AI jobs tend to be the largest players in their respective markets, so poaching talent away may be a challenge (Mandala 2023).

And finally, the fifth competition challenge comes in form of the ‘open-first, closed-later’ model. Companies use an open-source approach to lure in new business and fresh streams of data, building scale advantages before closing off their ecosystems to ‘lock-in customers and lock-out competition’ (Federal Trade Commission 2023b).

We don’t yet know the answers to these competition challenges and neither does artificial intelligence.

But, in forums like this, governments and regulators around the world are considering how best to reduce the risks associated with AI while reaping the economic and competition benefits.

Conclusion

So the lessons learnt from Australia are four-fold.

Number one, competition and economic dynamism are complementary. When working in tandem they are a vital duo for lifting productivity and living standards. But, as Australia has experienced in the 2010s, the opposite is also true.

Number two, competition reform can boost living standards, but it isn’t easy. The Hilmer Review and subsequent competition reforms in Australia in the 1990s prove that it’s possible to use competition to turn things around. Our ambition is the same today but we know the challenges are different.

Number three, competition is a productivity growth strategy requiring a full toolbox of approaches. This is a work in progress for the Australian Government. But I believe we have the right reform agenda for Australia and the right focus on mergers, non-compete clauses and the supermarket sector.

Number four, we need to consider the competition aspects of artificial intelligence. Dealing with technological change is complex, especially when it is coming at us fast. But we can make the most of opportunities by sharing perspectives in the spirit of bayanihan and mateship.

Thank you again to the Asian Development Bank for providing a forum to allow member countries to share their expertise on competition policy. And thank you to the Philippines for hosting and bringing everyone together.

References

Albanese A, Chalmers J, Leigh A (2024) Government to launch ACCC inquiry into supermarket prices Media Release issued 25 January 2024.

Albanese A (2023) A stronger partnership between Australia and the Philippines Media Release issued 8 September 2023.

Andrews D & Dwyer E (2023) Flying under the radar: Australia’s silent and growing competition crisis Article published by the www.conversation.com, 30 August.

Asian Development Bank (ADB) (2024) Asian Development Bank Member Fact Sheet: Australia.

Asian Development Bank (ADB) (2019) ADB Loan to Boost Healthy Business Competition in the Philippines, Media Release issued 11 December 2019.

Australian Bureau of Statistics (ABS) 2024 Restraint Clauses, Australia, 2023 Results of the Short Survey of Employment Conditions, containing experimental estimates on the use of restraint clauses in Australia. Released 21 February 2024.

Australian Competition & Consumer Commission (ACCC) (2024) ACCC and Philippine Competition Commission sign new Memorandum of Understanding Media Release issued 29 February 2024.

Balisacan A and Papa L (2020) Enforcer’s Roundtable: What’s under the radar? The evolution of competition law and policy in the Philippines, Association of Southeast Asian Nations.

Bezago T and Nyman S (2016) Competition and Poverty View Point, World Bank Group.

Chalmers J (2024) Merger reform for a more competitive economy Address to the Bannerman Competition Lecture on 10 April 2024, Sydney.

Chalmers J & Leigh A (2023) A more dynamic and competitive economy Media Release issued 23 August 2023.

Clark D (2023) ‘How Nvidia Build a Competitive Moat Around A.I. Chips’ The New York Times, 21 August.

Duarte F (2023) ‘Number of ChatGPT Users (2023)’. Exploding Topics, 13 July, web blog post, viewed 9 September 2023.

Engel P & Rafferty M (2024) Which supermarket has the cheapest groceries? CHOICE survey published 20 June 2024.

Federal Trade Commission (FTC) (2024) FTC Announces Rule Banning Noncompetes, Media Release issued 23 April 2024.

Federal Trade Commission (FTC) (2023) Generative AI Raises Competition Concerns, Federal Trade Commission, web blog post, 29 June, viewed 9 September 2023.

Leigh A (2022) A More Dynamic Economy The Australian Economic Review, Volume 55, Issue 4, December 2022.

Leigh A (2023a) A Zippier Economy: Lessons from the 1992 Hilmer Competition Reforms Economic Papers, Volume 42, Issue 3, September 2023.

Leigh A (2023b) Competition and Artificial Intelligence: An Australian Policy Perspective, TechREG Chronicle December 2023, Competition Policy International.

Leigh A (2024) How monopolies hurt the economy Opinion piece published in The Saturday Paper 8 June 2024.

Mandala (2023) AI Human Capital Investment Index, Mandala Report published 23 July 2023.

Marcos F (2024) The Philippines and Australia’s Enduring Friendship and Common Aspirations for the Future Address to the Parliament of Australian on Bayanihan and Mateship 29 February 2024.

Mulino D (2024) Better Competition, Better Prices Report on the inquiry into promoting economic dynamism, competition and business formation, House of Representatives, Standing Committee on Economics.

OECD (2023) Assessment of merger control in the Philippines, OECD Business and Finance Policy Paper, published 9 October 2023.

Productivity Commission (2005), Review of National Competition Policy Reforms, 28 February 2005.

Ravago M, Roumasset J, Balisacan A (2022) What influences adoption of competition law? The case of ASEAN Economies. The Singapore Economic Review, Vol 67, No.5.

Treasury (2023) Working Future: The Australian Government's White Paper on Jobs and Opportunities Report issued September 2023.

Treasury (2024a) Non-competes and other restraints: understanding the impacts on jobs, business and productivity, Competition Review Issues Paper released April 2024.

Treasury (2024b) Independent Review of the Food and Grocery Code of Conduct Interim Report Released April 2024.

Treasury (2024c) Final Report of the Independent Review of the Food and Grocery Code Review, June 2024.

Treasury (2024d) Government response to the Independent Review of the Food and Grocery Code of Conduct, June 2024.

Wong P (2024) Australia’s Asian Development Fund pledge delivers for the region Media Release issued 3 May 2024.


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  • Andrew Leigh
    published this page in What's New 2024-07-23 20:39:47 +1000

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Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | [email protected] | Authorised by A. Leigh MP, Australian Labor Party (ACT Branch), Canberra.