Economics Department

Economic Survey - Switzerland 2003 (January 2004): Product market competition and economic performance

 

How essential is enhancing competition for boosting growth?

 

The main medium-term challenge identified by the government is to raise potential growth. This is an appropriate focus even if international comparisons of GDP growth may overstate the Swiss “growth gap” insofar as national income has been rising somewhat faster than GDP. According to indicators taking into account the terms-of-trade gain that Switzerland has enjoyed over the last decades and the revenues earned on foreign investments, real income has risen by more than ½ percentage point a year faster than growth as usually measured by real GDP. Yet, even on the basis of these indicators, performance has been weak in international comparison, while prices are on average 40 per cent above the EU level. Improving the functioning of product markets and reinforcing competition, which is the subject of the special chapter of this Survey, would lead to stronger productivity gains, which are vital to stimulate potential growth. Vigorous competition spurs companies to continuously invest in producing new and better products, reduces rents accruing to dominant incumbents and raises pressures on businesses to allocate and utilise resources in the best way. Competition would also be stimulated by further economic integration with the European countries and worldwide.

Price levels in Switzerland relative to the EU

2001

 

 

Source:   Eurostat.

What needs to be done to improve the general competition framework?

The authorities have undertaken a number of reforms to strengthen competition policy. The most important is the recent revision of the cartel law, which should come into force in early 2004 and provides for penalties against anti‑competitive behaviour, without waiting for the firm to re‑offend, which will increase the dissuasive effect of the legislation. This is an important step and the new legal provisions now need to be strictly applied. The Competition Commission (COMCO) has since 2002 given clear signals that the legislation will be strictly adhered to, which is a departure from the timid approach adopted previously – for example with regard to vertical restrictions. It is important to persevere with this course of action. To succeed, however, COMCO will need funding and staff at least similar to those in comparable countries, which will mean increased resources. With the application of direct penalties and the leniency programme, the independence of COMCO’s members ought also to be better guaranteed and part-time membership abolished in favour of full-time membership at least for the presidency.

Staff resources of competition authorities1

 

1.     The effect of the size of the economy on staff/GDP ratios has been estimated by the following equation:
log(staff/GDP) = 0.513173 - 0.38325*log(GDP)

                                                   (1.5)           (-3.2)

       (t-statistics in parentheses)    .E.: 0.30          R2: 0.36                 

      The chart shows the residuals after control for effects of country size.           

2.  The darker colour represents the Swiss position if the staff of the competition agency is increased to 60 instead of the current 45 persons.

Source:      OECD.

What reforms are needed in network industries?

Liberalisation of network industries has been only partial and varied across industries, leaving room for further productivity gains and price reductions, prices being generally well above the OECD average. In some cases liberalisation has been slow, only responding with lags to EU directives and often pursued with less ambition. The long lags for designing and approving legislation inherent in the political system have contributed to slowing the reform process.

·        In the electricity market, the previous reform, which provided for a wholesale electricity market and for the separation of transmission from other market segments, was rejected in a referendum in 2002. A new project that adheres to this approach, together with the setting-up of a strong regulatory body, is necessary. Security of supply and environmental issues, while legitimate concerns, ought not be considered as barriers to reform.

·        Liberalising the natural gas market at the same time would avoid more delays and lead to synergies between the sectors; current initiatives by some private companies to set up a gas market are insufficient as they are only partial and do not provide for independent regulation and supervision of the separation of transport, storage and distribution.

·        In telecommunications, the most urgent task is the unbundling of the local loop, which would raise the market penetration of new participants.

·        The calendar for liberalising postal services should be accelerated to match the EU schedule and reforms in railway transport should avoid protecting incumbent operators from competition by creating an independent regulator. Moreover, competition in tendered lines of regional railway transport should occur on a regular basis without favouring public firms.

Electricity prices for industry and households

In US cents/kWh

 

1.       2001 for Germany, Netherlands and Spain; 2000 for Austria, Belgium, OECD Europe and OECD  total.

2.       2001 for Germany and Spain; 2000 for Belgium, OECD Europe and OECD total.

Source:    IEA, Energy Prices & Taxes, 3rd quarter 2003, IEA/OECD, Paris.

How could the service sector’s dynamism be strengthened?

Competition also needs to be stepped up in the service sector which is suffering from both the excessive segmentation of cantonal markets, notably for professional services, and insufficient openness to the pressures exerted by foreign competitors. The Domestic Market Act (DMA) needs to be amended to create a genuinely unified domestic market and to allow freedom of establishment in all cantons. COMCO’s role also needs to be strengthened so that it can appeal before the courts in the event of restrictive practices and systematically monitor and enforce the consistency of cantonal legislation with the principles of the DMA. The opening up of services to foreign competition in the context of a bilateral agreement with the European Union must also remain a priority, while the pace of the negotiations now in progress needs to be stepped up. The obstacles to effective foreign competition for patent‑protected products, including drugs, should be reduced. The possibility for the COMCO to act within the framework established in the new cartel law will only affect specific companies and products on a case-by-case basis. Negotiations should therefore be initiated with the European Union with a view to adopting the EU principle of regional exhaustion with respect to patent law. Coupled with the reduction of obstacles to the building of hypermarkets and effective measures to counter vertical agreements, these reforms would no doubt deliver a sharp fall in prices, leading to increased output within the sector concerned and more markedly so for the economy as a whole.

 

How could excessive costs be reduced in the health sector?

The most serious competition problems are concentrated in the sectors least exposed to foreign competition, and particularly in health care. Here, government intervention plays an important role, as it does in most other OECD countries. A reform of this sector should include the abolition of the obligation for insurers to contract in the ambulatory sector and the decartelisation of health care price setting. This is likely to lower the very high level of medical costs and strengthen control over spending growth, to the extent that insurers are able to negotiate lower average prices. Doing away with this obligation, which Parliament is considering, must not however perpetuate, de facto, an administrative control over supply that would not improve efficiency. If it is to be effective, the reform must treat all health care providers in the same way, both those recently qualified and those already in practice, who would then also run the risk of no longer being able to work for the compulsory health insurance system. Competition in the drugs market would be stimulated, if doctors were to prescribe active substances rather than branded products, and by a less restrictive policy with regard to putting pharmaceutical products on the market. In addition, reforms to hospital and physician payment methods should be pursued that provide incentives to improve efficiency.

 

Relative health price levels

Source:    Eurostat and OECD.

How could the fragmentation of the public procurement market be reduced further?

Competition is being enhanced in public procurement contracts, which constitute a large share of public spending. Switzerland has signed the WTO agreement that obliges the international tendering of large projects. For smaller projects, however, the market is still fragmented, with different bidding and appealing procedures across cantons, which introduce transaction costs and reduce competition. Bid-rigging seems also to be widespread due to the lack of effective deterrence from the current cartel law. To harmonise legislation and enhance transparency, an inter-cantonal Agreement on Public Procurement has already been signed, which should be quickly implemented by all cantons and communes. The thresholds above which lower levels of administration are obliged to tender public contracts should be lowered to raise competition, and provisions should be made to avoid the splitting of large public works into smaller contracts to escape from this obligation. In addition, harmonisation with the federal level should also be pursued.

 

Should reforms in agriculture be accelerated?

Agricultural policy is another area where public intervention impedes the adequate functioning of a market. The total level of support to agriculture has barely changed in recent years and is the highest in the OECD since the mid-1990s, resulting in food prices far above international prices. Although aid to agriculture has been more linked to environmental goals, these goals, together with other objectives (like social cohesion or rural development) could be met in a much cheaper way through other instruments, while public support should concentrate on encouraging alternative activities in rural areas where Switzerland has a comparative advantage.

 

Producer and consumer support estimates for agriculture1

Per cent

1.       For detailed explanations, see Source.

2.       EU-12 for 1986, EU-15 from 1995.

3.       Austria, Finland and Sweden are included in the OECD totals for all years, and in the EU from 1995.

4.       OECD excludes the Czech Republic, Hungary, Poland and the Slovak Republic for 1986.

5.       The first bar represents 1986 and the second 2002.

Source:    OECD, Agricultural Policies in OECD Countries - Monitoring and Evaluation, 2003, OECD, Paris.

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The full edition of the OECD Economic Survey for Switzerland is available from:

 

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