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The need for an efficient functioning of markets has been gaining progressive recognition in the developing countries as a mechanism to supply goods and services at reasonable prices for consumers, inputs at competitive prices for producers and for levelling the playing field for potential competing companies, including small and medium-sized ones.

Between the 1950s and the 1980s, the control of prices, interest rates and imports in Latin America guaranteed the development of the national industry, as well as the access of population and producers to essential services and to banking credits at preferential rates. This situation became impossible to sustain after the mid-1980s. The over-indebtedness, the enormous fiscal deficits and a growing lag in the competitiveness of the productive sector, among other factors, ended the aforementioned policies. Therefore, an effort to promote the good functioning of markets was, and continues to be, one of the routes that can help these developing economies to ensure a suitable behaviour of economic actors. However, that has not happened in a spontaneous way despite the macroeconomic policies of opening and deregulation. That is why the competition policy becomes indispensable to eliminate distortions in the markets.

This book focuses on the development and the challenges that the competition policy faces in Latin American countries, with a special interest in the small economies of Central America. Most of the latter countries have incorporated competition policies with a considerable lag in their governmental agendas. Thus, the main aim of this book is to analyse the market distortions in that region, the legal and institutional competition instruments governments rely on and those that could be developed to face such distortions.

The competition policy – understanding by that, mainly, the antitrust law and the competition agency in charge of applying it – has faced serious difficulties in the Central American Isthmus. There is a fertile land for anti-competitive practices in this region given its numerous national markets of reduced size and its concentrated productive structure, especially in the non-traded product areas. These markets often shelter horizontal monopolistic practices (e.g. agreements among producers of goods or similar services to fix prices, to fragment markets geographically), as well as vertical practices (e.g. conditioning of input purchasing or input sales; establishing contracts of exclusivity in the distribution and sale of goods). It is particularly important for the competition agencies to distinguish concentrations that respond to a necessity of a greater firm size required by a technological innovation which will improve industry efficiency from the practices that search the increase in profit margins through monopolistic power.¹

The scarce resources of competition agencies in countries with little human and financial capital call for a special effort to adapt the competition policies commonly used in developed countries to their own realities. Social conditions lagging behind, the great number of small and medium-sized firms and the exposure of competition authorities to be "captured" by groups of interest demand a careful design of competition policies in those countries (see Schatan and Avalos, 2006).²

Besides making a comparative and critical analysis of the Central American countries' experience (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama), additional reference points are taken into account in this book, especially from Mexico. Among the Latin American countries, Mexico is the closest to Central America, not only geographically but also in competition policy subjects. In fact, Mexico has had a strong influence on the laws of this region, so that it is a forced reference when studying the countries of the Isthmus. Although the latter nation differs in size from the former ones, they share a similar cultural, legal and institutional background. The competition authorities in Mexico have had to find ingenious solutions, not always successfully, to solve difficult cases in a relatively weak institutional framework. A helpful aspect of the Mexican competition policy is the cumulative experience regarding the notification to the competition authority obligation prior to the merger.

It is important to point out that the combination of supports and resistances faced in order to engender the competition policy explains the degree of speed upon which such policies were introduced in the studied countries. Between 2004 and 2006, progress has been fast, since three countries enacted their competition law for the first time and two others revised them. The sequence of law enactment in the seven countries under study is the following: Mexico (1992, and amended in 2006), Costa Rica (1995), Panama (1996, and amended in 2006), El Salvador (2004), Honduras (February 2006) and Nicaragua (October 2006).³ Guatemala was still in the process of discussing a law project at the end of 2006. The experience gathered by the first countries that enacted competition laws has been very useful for the rest of the countries.

This book also analyses the specific conditions and policies of competition in two strategic sectors – telecommunications and banking – in six Central American countries and Mexico. These two sectors are crucial as much for the possibilities of advancing economies more quickly in the technological innovation and competitiveness as for increasing population's well-being. This is important since intercommunication has become a basic need for society, as has the access to credit and banking services. The Central American region, to a greater or lesser degree, still suffers from a lag in the access to these services. This situation is, partly, a consequence of an incapacity of oligopolies and monopolies (until recently public) to respond to the increasing demand of population and companies to these services. These two strategic sectors have also been highly regulated. However, this regulation has neglected the consequences of maintaining a highly concentrated market and has not demanded a competitive behaviour from companies.

¹ For greater details on restrictive competition practices, see UNCTAD (2004).

² On the economic groups formation and the role played by them in Central America, see Segovia (2006).

³ The studies contained in this book were concluded in September 2006, i.e. before the Nicaraguan competition law enactment (October 2006); hence, this legal change is not taken into account in the chapters of this book.

In the telephony sector, the countries under study show different trajectories in privatization and liberalization, as well as in their market performance. In all of these countries, however, this service has improved substantially since the incorporation of the mobile telephony. This technology has allowed the expansion of telephone connections at an accelerated rate and has been able to respond to a long-time dissatisfied demand. Meanwhile, in spite of its expansion, the fixed telephony shows that it is still lagging behind. As will be seen in this book, the behaviour of agents in the market has shown different results in different market segments (mobile telephony and fixed telephony). Private monopolies that emerged from the privatization have had comparatively a much greater capacity to remain as the only company in the fixed telephony market (specially those companies to which the government gave an exclusive concession for several years) as compared to the mobile telephony sector, where there has been more space for the entrance of new companies. In any case, the companies that managed to hold on as monopolies at a national level have tended to dominate not only national markets but also regional and international ones. From this reinforced position, and helped by the convergence of networks and services, these monopolies also have progressively been positioning themselves in the market of mobile telephony, while increasing the competition in this market. Nevertheless, the increasing presence of regional duopolies in telecommunications and the competition policy's institutional weakness may frustrate the possibility to improve competition further. In a context of high barriers to the entrance and weak competition policies, the strong and generalized dominion of companies such as Telefónica and Telmex-América Móvil may encourage large companies to distribute markets among themselves and hence dominate most of them in the telecommunication sector.

Like in other countries and regions, the banking sector is one of the most State-regulated markets. This is because its inadequate operation can cause potential economic imbalances. In fact, this sector's lack of solidness led to diverse insolvency crises, especially during the first half of the 1990s. Since then, the countries of the region have subscribed the Basel Protocol, which has led to the introduction of international norms of financial supervision and to other mechanisms in order to guarantee the sector's stability. These measures have had the aim of improving the capitalization and financial soundness of the banking system. On the other hand, this has led to a greater market concentration. Nevertheless, the mere concentration in the market structure is not an indicator of abuse of market power. In fact, the information technology, the offshore operations and the greater facility for the free flow of international capitals have introduced a greater contestability in the banking system of Central America and Mexico. But important anti-competitive practices persist in this sector, and the Mexican case, studied in this book, is quite illustrative of this behaviour.

Costa Rica has been the country that accounts for the richest experience in the field of competition policy in Central America. This country not only was one of the first countries in signing an antitrust law and in creating a competition authority (Comisión de la Promoción de la Competencia, CPC), but its legal and institutional design also made the processing of hundreds of cases possible throughout ten years or more. This experience contrasts with the case of Panama, which has been limited by its unavoidable bond with the judicial system. The study on Costa Rica provides a detailed analysis of the most important cases taken by the CPC, from its creation, obstacles, the useful instruments available for their solution, to the learned lessons and the best international practices.

Although it goes beyond the objective of this book, it is important to point out that the obstacles faced by small economies to have an effective legal and institutional competition framework could be lessened through regional and international cooperation. Such cooperation has already begun to take place in trade agreements both among Latin American countries and with third countries. Nevertheless, a solid competition policy is needed at a national level. The competition clauses can include a wide spectrum, from cooperation involving consultations between competition authorities to the joint resolution of anti-competitive practices affecting countries in the region. On these lines, an important case is the agreement reached by the Andean Community, which has a Competition Commission with supranational powers. Countries in the region lacking an antitrust law of their own can use such an agreement.⁴ Nevertheless, the latter regional administrative entity has not reached the expected results, which has led to a reform in the agreement in 2005. Among the most influential changes carried out by the Andean Community are the greater competencies given to national agencies of competition. Therefore, strong national institutions are needed to support the growing mutual support in competition issues in a context of economic integration (Silva and Alvarez, 2006). Likewise, cooperation between developed and developing countries – key to approach anti-competitive practices of multinational companies – requires a greater institutional soundness from the latter countries. Otherwise, the competition policy institutions in the developed countries would prevent developing countries from the access to their information because they would fear that this could be handled in an inadequate way (Stewart, 2005).

The three following chapters have been elaborated based on seven national studies (six in Central America and Mexico). Chapter 2 analyses the competition policy laws in these seven countries. Chapter 3 presents a comparative analysis in the telecommunications sector for the same group of nations. There is also a regional comparative analysis for the banking sector in Chapter 4. Chapter 5 reviews the main case studies in Costa Rica, the country with the richest experience in competition policies in Central America. It emphasizes the obstacles faced as well as the lessons learned by the competition agency in that country. Chapter 6 contains a study on competition policy in the Mexican banking system which, notwithstanding its greater openness to foreign investment over the last years, is still considerably inefficient. This is a valuable point of reference for the Central American region where foreign capital is quickly starting to make its way into the financial market. Finally, Chapter 7 summarizes and interprets the main findings for Central America and for Mexico of the research conducted for this volume and relates those findings to the experiences of nascent competition agencies in other developing countries.

⁴ Bolivia and Ecuador.

Bibliography

Schatan, C., Avalos, M. (2006), Condiciones y políticas de competencia. Economías pequeñas de Centroamérica y el Caribe, FCE and ECLAC, Mexico.

UNCTAD (2004), Model Law on Competition. http://www.r0.unctad.org/en/subsites/cpolicy/docs/Modelaw04.pdf.

Segovia, A. (2006), Integratión real y grupos centroamericanos de poder económico. Implicaciones para la democracia y desarrollo regional, ECA: Estudios Centroamericanos, ISSN 0014-1445, N°. 691–692, pp. 517–582.

Silva, V., Alvarez, A.M. (2006), Cooperación en políticas de competencia y acuerdos comerciales de América Latina y El Caribe: desarrollo y perspectivas, serie Comercio Internacional, N° 73, CEPAL, Santiago, Chile.

Stewart, T. (2005), Special cooperation provisions on competition law and policy: the case of small economies, In: P Brusick et al (eds.), Competition provisions in regional trade agreements: How to assure development gains UNCTAD, New York, Geneva.

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