Promoting Competition: Mirages and Reality

It would be incorrect to assert that competition in Lithuania is neglected. Competition is on everyone’s mind, and not only when it concerns the competition law or the State Competition and Consumer Protection Service. Look at government regulations or legislation relating to taxes, corporate activities or the use of public funds. More often than not they are justified by a seemingly weighty argument: They are intended to promote and protect competition. These legal acts establish so-called measures “to promote competition”: starting with tax breaks for selected business groups down to creating individual operational conditions for specific companies.
These are but a few examples of what deeds are done to promote competition. And these examples, make no mistake, are not limited to Lithuania.
The easiest way to “help” competition is through tax laws. Take a newly adopted programme for revising tax legislation. On the one hand, it states that taxes will no longer be used to regulate the economy. On the other hand, however, the document justifies a lower income tax rate for small and medium-sized enterprises (SME).
When the SME law was adopted and differentiated tax rates were applied to SME, the good intention was to create conditions for small enterprises to compete with large ones. Yet, even the layman knows full well that virtually no competition occurs between small and large enterprises. A shoemaker will not compete against Lithuania’s largest Mazeikiu oil refinery, nor a hairdresser against the Lithuanian Telecom. Competition is between those who are selling the same or similar goods or services. A laundry competes against another laundry, a bookshop competes against another bookshop, etc etc.
Competition is in jeopardy when competing firms (say, laundries) are on different sides of the law: when one of the firms happens to satisfy artificially created criteria, while the other does not. As a result, the former can enjoy a lower tax rate, while the latter cannot. When some firms are required to pay twice as high taxes, no one cares that they have only one employee more and earn only a thousand dollars a year more than others. Obviously, competition will be in danger until such artificial limits exist. A prominant role here is played by EU directives. The advocates of the said methods have often justified them by the need to adjust to EU directives.
Just as often competition is promoted by using taxpayers’ money. We are now witnessing the rivival of corporate welfare programmes, which are aimed, among other things, at encouraging the competitiveness of local exporters and buttressing “up-and-coming” competitors. Government largesse is extended to narrow interests, benefitting the few at the expense of the many. Consequently, it makes no sense for those out of the running to compete against the government and its dispensed favours. Competition is transferred from the market into the corridors of power.
The ideology of providing state aid – and of discriminating against the “ineligible” for that matter – has lately reached a point where the flawed concept of competition promotion is sought to be legitimised. The government has been conceded a right “to improve and negotiate business conditions.” The law leaves it up to bureaucrats to choose whom to help and how. Take amendments to the law on tax administration or the draft law on investment. Their essence may be defined in two provisions. First, the government may create individual conditions for an enterprise which has invested over 50 million US dollars. Second, the government itself may invest up to 2 percent of GDP every year. So, the government provides favours not only for specific business groups but also for individual companies. The worst of it is, the state takes part in competition, increasing its involvement by 2 percent of GDP every year.
By trampling on the basic principles of competition and the only rightful way to bolster competition by putting all market participants on an equal footing, the government transfers competition, by and large, from the market to the corridors of power. One press release said the law on competition was designed to protect those who are ill-treated. Yet, this law is no help in the corridors of power. No one protects those who are abused by the state.
Extensive interventions in the market on the part of the state result in distorting competition. Competition comes to be controlled by the state rather than the consumer. Entrepreneurs are made to worm their way into the favours of bureaucrats, who would be redundant in an unregulated market. Competition which is aimed at pleasing consumers comes a poor second. The consumer is left with dearer goods, higher taxes and… no choice, since the government has already made a choice for him. The competitive battle in the corridors of power is won by him who can make the best use of government-dispensed favours. This could be a small enterprise owner, an exporter, a job creator, an up-and-coming competitor or just a good chum of some official’s for that matter.
Obviously, competition cannot be achieved and secured by a single law on competition. If proper conditions are to be created, all legal acts must be completely neutral, or inelastic, with regard to competition. Just like an inveterate offender cannot judge others, a player cannot be a referee at the same time. If the state aims to foster competition, it must withdraw from business and terminate violations of the market for which it means to punish others.