ANTITRUST POLICY IN BRAZIL:
RECENT TRENDS AND CHALLENGES AHEAD

By Gesner Oliveira, Professor, Getulio Vargas Foundation in São Paulo,
and President of CADE

Brazil has had a competition agency, Conselho Administrativo de Defesa Econômica (CADE), since 1962. However, it was only in the 1990s that competition policy became an important issue in the public agenda. This article provides a brief overview of this process with emphasis on the recent trends and future prospects for Brazilian antitrust policy.

Competition Policy and Economic Reform

In contrast to the historical context of the U.S. Sherman Act, the rise of competition policy in developing countries since the late 1980s is associated with a change in the role of the state in the direction of less intervention in the markets. This has indeed been the case for Brazil, where trade liberalization, deregulation, and privatization have changed dramatically the economy since the early 1990s.

Competition law and policy are at the same time products of this movement toward economic reform and catalysts of the recent transformations. They are a product of economic reform in the sense that, as a result of privatization, deregulation, and trade liberalization, there is a genuine social demand for the repression and prevention of the abuse of economic power, now more concentrated in the hands of private agents. They are factors, or catalysts, of economic reform in the sense that implementation of competition policy -- especially in its competition-advocacy dimension -- represents an important factor for the continuation of the liberalization process.

Thus, the advancement of competition laws is, in principle, good news for the foreign investor. Of course, one wants to make sure that the newly enacted legislation is not misused and that the right type of institutions is developed. Well implemented, the competition laws can help maintain and deepen the liberalization process. This has been the major objective of CADE in the past few years.

Brazilian Competition Legislation

Brazilian competition law does not differ significantly from the international standards. Although the first important legislation dates back to 1962, competition policy gained importance with Law 8884 of 1994, which introduced merger control and transformed CADE into a more independent body and pioneered the format of the recently created regulatory agencies. CADE has one president, six commissioners, and one attorney general, all of whom serve for a two-year fixed term. Decisions of CADE can be appealed only to the judiciary.

In contrast to the majority of the emerging economies, Brazil has already reached a considerable number of administrative decisions, most of them enacted after 1994 under Law 8884.

Two trends are worth noting:

There has been a vast increase in the number of decisions after 1996, associated with the new environment created with the stabilization of the economy and the modernization of CADE. The monthly average since 1996 went up by more than 10 times the peak of the previous period since 1962.

Conduct cases, which are a type of antitrust case, have prevailed during the whole period (77 percent of all antitrust cases), but merger decisions reached 51 percent in June-December 1998. This partly reflects the relatively more efficient analysis of the merger cases; as investigation of anti-competitive practices improves in quality and speed, one should expect a larger share of conduct cases.

In regard to conduct cases, several aspects deserve attention:

A high percentage of cases (24 percent) are related to a type of illicit behavior called in Brazilian law "abusive price." These are practices associated with the failed attempt on the part of past Brazilian administrations to control inflation through direct intervention in the market place. This explains a good part of the high proportion of cases that have been terminated without any penalties. Such terminations are positive to the extent that previous arbitrary state actions are no longer causing uncertainty to private agents.

Investigation has been too slow in a large number of cases, increasing public and private costs.

The percentage of cartel cases is high, but the share of certain types of illicit practices such as bid-rigging is still low.

Aspects of Merger Cases

In regard to merger cases, six aspects are worth noting:

There has been a clear tendency to reduce the share of transactions that are subject to preconditions for approval. In June-December 1998, almost all transactions were approved without any conditions, in contrast to none in 1994-1996.

The frequency of the performance commitments -- agreements between CADE and the merging parties establishing the conditions under which the merger can be approved by CADE -- has been reduced relative to earlier periods, and the nature of the requirements has changed. Since March 1996, CADE has shown a preference for structural conditions rather than behavioral ones.

In June-December 1998, there were no performance commitments observed. In cases of partial approval of mergers, there has been a preference for once-for-all measures, rather than agreements with the private agents that must be monitored on a regular basis.

There has been a systematic attempt to eliminate excessive bureaucracy, especially in the simple cases.

As in other jurisdictions, the rate of merger disapproval has remained low (less than 5 percent) and is decreasing.

Decisions have become more detailed and have given alternatives to the private parties whenever possible.

It is important to note that CADE has emphasized its competition-advocacy function. Actions have ranged from public statements in favor of deregulation of civil aviation and of a project developing a market for generic drugs to judicial action against individuals who have tried to inhibit the practice of rebates in taxi fares in Brasilia.

An important dimension of implementation is the experience with the court system. In Latin America this might be one of the greatest challenges for competition authorities. There are currently 70 cases in the courts; one should expect this number to increase exponentially in the next few years as Law 8884 becomes more well known.

The number of appeals should also increase due to the more active stand CADE has taken and the increasing number of pecuniary penalties applied. Fines have increased in number and in value, especially for late notification.

In Brazil, as in the United States, despite the fact that the competition law is a federal law, there is a high degree of autonomy of the states of the federation that will lead to the discussion of several cases at the state level.

Recent Changes

In order to adapt to a global economy, CADE has gone through major reforms:

Internal rules were changed in order to speed up the decision process, as well as to assure strict respect for due process of law.

A code of ethics was created, introducing simple but useful rules regarding conflict of interest and sexual harassment, among other issues.

Merger control procedures were totally reviewed, introducing a two-stage process of analysis, harmonization with notification forms of the Organization for Economic Cooperation and Development, and simplification of the information and documentation required. CADE's review process is expected to fall from seven months to just under two and one-half months. It was 20 months before the first innovations were introduced in 1996.

Provisional filing fees for merger control and consultations to CADE were transformed into law in January 1999, assuring complementary resources to CADE's budget.

Globalization and International Cooperation

In a global economy, international cooperation in the area of competition has become of utmost importance. Given the greater degree of interdependence among national economies, very often business practices and transactions have affected several jurisdictions. In 1996, concentration occurred in the Brazilian toothpaste market as a result of a transaction involving two U.S. firms (American Home Products and Colgate), which affected the strategy of a third U.S. company (Procter & Gamble).

The application of extraterritoriality clauses of itself is insufficient to cope with the new global agenda. Harmonization of procedures and permanent cooperation among the various national authorities could certainly reduce public and private costs incurred in the application of merger control. This is one of CADE's major objectives.

As pointed out earlier, the mere enactment of a competition law is not enough to assure that markets will function well. World trade and welfare will only increase if national laws are implemented observing the principles of transparency and nondiscrimination among nations. This is why technical assistance should focus on institution building. It is less important to write new laws than to promote new, modern, independent, and transparent competition agencies. This is in line with the Panama Declaration, which resulted from the meeting of all competition agencies of the Americas in October 1998. The document expresses the participants' intention to "cooperate with one another, consistently with their respective laws, to maximize the efficacy and the efficiency of the enforcement of each country's laws, and to help disseminate the best practices for the implementation of competition policies, with emphasis on institutional transparency."

The Group on Trade and Competition of the World Trade Organization (WTO) has also proved to be very useful for benchmarking and disseminating competition policy among the developing countries.

The nature and depth of international cooperation varies according to the stage of institutional development. Most countries in the world are at very early stages and can benefit enormously from technical assistance. Indeed, there is a political market failure in terms of the amount of resources allocated to competition offices. Due to the free-rider problem, competition agencies tend to be underfunded. Equilibrium obtains at a point of institutional underinvestment.

CADE's budget is 65 times smaller than the equivalent of its U.S. counterparts although Brazilian gross domestic product (GDP) is only 10 times smaller than U.S. GDP. Since there are economies of scale and of learning for the implementation of competition laws, at the earliest stages new competition offices should have more resources, not less.

Furthermore, the competition policy agenda is now more extensive and complex than it was a decade ago. New issues such as interaction with the regulatory agencies and the WTO agenda have to be addressed at the same time as basic staff training and the acquisition of computers. The competition official in mature jurisdictions has to apply competition principles given a stable and adequate pre-existing environment. The competition official in a developing country has to help create such an environment for effective application of competition law.

As countries develop their institutions, they will engage in bilateral and/or plurilateral agreements. CADE has had an agreement with the Competition Commission of Argentina since 1996. A Brazil-U.S. agreement is expected to be signed shortly.

Challenges Ahead

Although a great deal has been accomplished in the last few years, Brazilian competition policy has a long way to go in order to reach institutional maturity. The following tasks pose the major challenges:

Improve investigation of conduct cases.

Create efficient forms of cooperation with the regulatory agencies.

Intensify international cooperation through active engagement in technical assistance, benchmarking, and bilateral and regional agreements.

This will have to be done under a more adverse environment than in the past four years due to the macroeconomic difficulties faced by Brazil in the aftermath of the Asian and Russian financial crises and the more recent Brazilian exchange rate crisis, which led to a change in the exchange rate regime.

Three relevant issues for competition policy derive from the new macroeconomic picture:

First, the budget constraints will continue to be very severe, suggesting the usefulness of the newly created filing fees.

Second, the elimination of the exchange rate as a nominal anchor and the depreciation of the Real pose new inflationary pressures. Given the past history of monetary indiscipline and indexation, there is a risk of a resurgent price-wage-exchange rate spiral that has pressured past administrations to resort to price controls. It is important to realize that this type of policy is useless, but at the same time to move forward with new mechanisms for transition economies like Brazil.

Third, the rate of protection will tend to be higher as a result of the new exchange rate policy as well as the trade restrictions that had to be imposed as a result of the exchange rate crisis. This means that markets will be less subject in general to import competition than before.

Regardless of the particular present circumstances of the economy, the medium-run goal is to improve CADE's three roles: repressive, preventive, and educational. In the beginning of antitrust history, the repressive role was the most salient one. During the 20th century, the development of ex-ante controls, in particular the development of merger review, has become an important complement. However, in a modern and global economy, the educational role is the most important one. Dissemination of competition culture and institution building seems to be the most important task in terms of international cooperation.

Economic Perspectives
USIA Electronic Journal, Vol. 4, No. 1, February 1999