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Opinions of Monday, 28 March 2011

Columnist: Armah, Stephen E.

Why Ghana needs Anti-trust laws

The word "Anti-trust" may seem strange to most Ghanaians although it should not. Paradoxically Anti-trust laws seem to confound some seasoned Ghanaian lawyers as I found out interviewing several of them for this brief recently. But why should we care about anti-trust laws in Ghana?

To understand the transformation that such laws can bring to the Ghanaian economy, it is instructive to commence by trying to comprehend the origins of the word "Anti-trust.” Recall that another name for a monopoly is a "Trust" so Anti-trust laws simply refer to Anti-monopoly or Pro-Competition laws. Why will Anti-trust laws promote Ghana's development? There are too many reasons to list so I will try to make a brief argument here. Economists believe that vigorous competition coupled with strategic government regulation to reduce anti-competitive behavior provide the most enabling environment for development. The purest form of competition is perfect competition where there are numerous sellers selling an identical good so that no one single seller has control over price. Further there are no entry or exit barriers so that any firm can enter or exit the market.

Competition leads to efficiency by reducing costs. Thus any firm or organization which prevents competition either by preventing the establishment of more firms producing similar products or by colluding with existing firms in order to set identical prices higher than the perfectly competitive market price has to be sanctioned. In the US and UK, Microsoft and Wal-Mart were each sued billions of dollars for preventing competition. This serves as a deterrent for other firms with such collusive aspirations.

How does all this apply to Ghana? Foremost among the most important challenges facing Ghanaian businesses today are the high capital (interest rates), energy (electricity), transportation (fuel) and communication (telephone and internet) costs.

This is so because these services are provided by industries with limited actual competition. Very few firms provide these services ensuring as a consequence high prices and profits. A cursory scan of Ghanaian newspapers in the past few years provides ample evidence: cell phone companies MTN, Vodafone, Tigo, and Airtel are among the most profitable in the country although their call rates remain high. Competition should drive these prices lower and force them to offer incentives like free night time minutes and free phones to entice consumers. Even where there are numerous firms in an industry such as in the banking sector, one is tempted to argue that some collusion may be responsible for the prevailing high interest rates. The corollary is that the consumer is left with no option than put up with exorbitant interest rates which are much higher than pertains in other African countries. While banks remain amongst the most profitable businesses in Ghana, poor service delivery remains a recurring concern. In some cases bank customers have had to contend with long queues and highly cantankerous cashiers.

It is possible to determine whether a particular industry is perfectly competitive: if it is, price will exactly equal marginal cost (where marginal cost is the cost of producing an additional unit of output). Anti-trust lawyers and economists in the US are able to determine in a systematic way if firms are colluding or actively blocking competition and are able to sanction them accordingly.

However, they are able to do so because these countries have antitrust laws which can be enforced. Ghana does not have anti-trust laws (a composite anti-trust regime for that matter) so when Ghanaian banks charge high interest rates they have not flouted any laws. All our president can do is to beg them (moral suasion) to reduce the interest rates because they are not required by law to do so.

Even more depressing is the fact that the Bank of Ghana (BOG) routinely reduces interest rates for these banks and has some leverage over them because of reserve ratio requirements etc. But they cannot compel the banks to pass on lowered BOG interest rates to Ghanaians.

This means that when the BOG lowers interest rates for banks from say 25% to 10% and the banks keep the interest rates for Ghanaians at 22%, the banks are the ones gaining because they pocket the difference (22-10% = 12%).

When Anti-Trust laws are passed it is likely that borrowing rates will plummet so that Ghana’s Small and Medium Scale Enterprises (SMEs) will get the needed capital to scale up. At the moment there are numerous Ghanaian entrepreneurs brimming with promising ideas but productive domestic investment faces a lack of capital infusion. The anti-competitive situation is no different in Ghana’s telecommunication (cell phone and internet) market where there is significant market power as well. In Ghana likely collusion among telephone companies seems to follow the Stackleberg leader form of oligopoly market power with MTN as the price leader.

For example, when MTN recently reduced call rates, the other companies followed suit but no one tried to under-cut MTN’s price. The phone sector needs to be regulated as well. Lower telephone and internet costs will reverberate through the economy encouraging people to find innovative ways to get even more use out of cell phones. Medical care can reach patients digitally because each person will have a cell phone even in remote areas. Money can be sent to and from different parts of Ghana in real time. More children will have access to the internet leading to positive externalities derived from access to online books and learning resources.

For the power sector, we have a state monopoly in the Electricity Company of Ghana(ECG) that needs to be exposed to the vigor and vagaries of market forces induced by competition from other power companies(local and international) because ECG may have grown quite inefficient due to lack of competition.

In conclusion, as I alluded to in the introduction the linkages between anti-trust laws and development in Ghana are too numerous to enumerate. One hopes however that our publics have been sufficiently apprised of the most salient point: Antitrust laws can energize the Ghanaian economy and catalyze rapid development. Sustained national discourse on this matter leading to the construction of a composite anti-trust legal regime is here being canvassed for.

Stephen E. Armah Economic Policy Unit