OCTOBER 30, 1975
Competition Policy in Canada
AN ADDRESS BY Dr. Sylvia Ostry,
DEPUTY MINISTER, DEPARTMENT OF CONSUMER AND CORPORATE AFFAIRS
CHAIRMAN The President,
H. Allan Leal, Q.C.
Dr. Ostry, ladies and gentlemen: Our distinguished visitor and guest speaker today, like young Lochinvar, came out of the west. More particularly, she carne out of that relatively small Jewish community in Winnipeg's north end which has provided a disproportionately large number of prominent Canadians who add such lustre to our national life. I refer, of course, to people such as the Honourable Sam Freedman, Chief Justice of the Supreme Court of Manitoba; his brother, Max, the Washington correspondent for the Manchester Guardian; Max Cohen, sometime dean of the Faculty of Law, McGill University, and currently Chairman of the International Joint Commission; the novelists, Adele Wiseman and Jack Ludwig; and Larry Zolf of the CBC, to mention only some of them. She is, indeed, in illustrious company and in the great tradition.
In dwelling upon the biographical material and the achievements of Dr. Sylvia Ostry, I am impressed with the intellectual schizophrenia which, by design or the sheerest chance, appears to be a compelling factor in her life, a concatenation of disparities which would drive lesser mortals to despair. It takes a special kind of person to see the grand design, the beauty and the symmetry in such seemingly unconnected matters as a formal education in medicine and economics; the uninhibited life of the academic, which she pursued with such distinction for a period, and the pragmatic strictures of governmental administration within which she now must work; the academic allegiance of a scion of both Oxford and Cambridge--a mixing of the muddy waters of the Isis and the Cam; in her own discipline of economics to be undismayed by the spectre of recession and inflation existing in awesome proportions at the same time; and, finally, in the government department of which she is the administrative head, to have within one's knowledge and expertise the details of the new competition bill (a brave new venture in government monitoring of the market place) in one branch of her responsibility, whilst guiding the destinies of policy and administration in another branch dealing with the civilized world's oldest private monopoly patents and industrial property generally.
These things she has done, is doing, and more, all in a way that leads one to believe that, alone in this modern world, she has recaptured the happy versatility of the ancient Greeks. In a manner of speaking, the world is her "Ostry".
Ladies and gentlemen, it is indeed a pleasure and privilege for me to introduce Dr. Sylvia Ostry, Deputy Minister and Deputy Registrar General, Department of Consumer and Corporate Affairs, Government of Canada, and I invite her to address us on the subject, "Competition Policy in Canada: Yesterday, Today and Tomorrow".
I am very pleased to have this opportunity to address the members of the Empire Club. This is a particularly propitious time for such an address for a number of reasons. The first stage of the proposals to amend Canada's competition law has just received final reading in the House of Commons, and the current policy environment heightens the importance, today and for the longer-run, of reflecting once more upon the significance of competition policy for this country.
One can safely assert that the development of a new competition policy for Canada has not been an easy task. I was recently glancing again at some of the reaction that has greeted the continuing efforts in this direction. To some of its opponents, competition legislation is clearly something to be placed in a catalogue of horrors, matched only, perhaps, by plagues, incest or tax reform. The long debate over the competition bill, or more precisely bills, has certainly been characterized by much sound and fury. The obvious questions are why has the government persisted in its efforts? Why, in view of the strong opposition from many powerful segments of the community, has the government felt it necessary to proceed with the attempt to bring forth a major revision of Canada's competition policy?
The simple answer to that question is this: the evidence is quite clear that an effective competition policy can contribute to the strength of the economy and the welfare of Canadians--all Canadians; we do not yet have an effective competition policy; and, in face of the changes taking place in the approach by other countries, and particularly our trading partners, Canada's present anti-combines legislation is proving to be dangerously behind the times. I would like to elaborate in turn on each of these points. First let's look at the importance of competition policy to the realization of Canadian goals.
The primary objective of competition policy is to promote efficiency in the allocation and use of the economy's resources. Efficiency is, of course, something that depends on a combination of factors including receptive attitudes, beneficial organizational and institutional structures, and a favourable economic environment. But when competition policy is working well it will help encourage a high level of economic performance, and make a not insignificant contribution to seeing that the economy's scarce resources are used to their best advantage in meeting the demands of consumers.
In this sense, competition policy should commend itself to all market participants. For consumers, well-functioning competitive markets mean greater product choice and the availability of higher-quality and lower-priced goods and services than would otherwise exist. For producers there will be an increased incentive to innovate, to keep costs down and to eliminate sloppiness. And for Canadians generally an effective competition policy will help in the achievement of a strong rate of economic growth.
When the Economic Council issued its Interim Report on Competition, it was careful to point out that a competitive market is not something to be sought for its own sake; the goal we should be striving for is efficiency. Competition is important because, and here I quote the Council, "Competitive forces where available provide the surest stimulus to the efficient production of goods and services". In other words, there may be circumstances in which competition is inimical to efficient performance; but as a rule competition policy should be directed to promoting a situation of every man for himself and may the least competent get hammered.
This description, harsh as it may sound, paradoxically reflects what to many is perhaps the most appealing aspect of competition: its conformance with a very basic (if perhaps increasingly unfashionable) notion of fairness. Fairness in this sense describes a situation in which individuals are free to compete and limited only by their desire and ability to do so. An effective competition policy will remove artificial restraints from the market and substitute regulation by market forces for regulation by industry or by government.
In this connection it's worth stressing that the importance attached to competition policy in a sense constitutes a reaffirmation of the government's endorsation of the fundamental "legitimacy" of the market in a pluralist society. What is being said in effect is that the basic economic questions, of what is produced, how and for whom, can, in most cases, best be answered not through increased government intervention and regulation, but through the interplay of market forces. The function of competition policy is to encourage these forces, to strengthen the invisible hand which has, over the years, become increasingly palsied:
Of special importance in today's environment, is the role of competition policy as a potential weapon in the long-term battle against inflation. It seems clear that at times large and powerful industries have played an important leadership role in the inflationary process; the price and wage increases established by these industries have very often been the targets at which others with less market power aim. As well, there is considerable evidence that prices in concentrated industries are less responsive to changes in the general level of business activity. This suggests that by reducing opportunities for the exercise of market power, competition policy can help to provide a firmer basis for the operation of the traditional economic levers and a greater prospect for success in controlling inflation.
I expect that these arguments indicating the importance of competition policy are not totally unfamiliar to you. Nor, I suspect, are most of you unsympathetic to what we are trying to achieve in terms of a more efficient economic apparatus. Some businessmen, however, have questioned the desirability of various proposals in view of the particular characteristics of the Canadian economy. I would argue that important features of the Canadian economy make it particularly essential that we develop an effective competition policy. I am thinking, especially, about the degree of openness of the Canadian economy and the extent to which our collective prosperity rests on the ability of Canadian industry to maintain its international competitiveness. I also have in mind some data which indicate a disturbing level of concentration in the Canadian economy. A study by my department showed that in 1965 there were 170,000 active corporations in Canada, but that the 174 largest accounted for half of total corporate assets. The same study showed further that industrial concentration is considerably higher in Canada than in the U.S.: the fifty largest manufacturing companies, for example, accounted for 36% of total manufacturing valueadded in Canada, as compared to 25% in the U.S. These figures suggest the existence of considerable market power and they indicate that the Canadian economy may be particularly vulnerable to abusive and detrimental market practices.
The degree of concentration in Canada is perhaps partly understandable in view of the relatively small domestic market. But there is considerable evidence that, despite the highly concentrated structure of Canadian industry, production units in this country tend to be excessively diversified, are often undersized, and typically unable to exploit potential economies that are available from longer production runs. A number of studies have linked both the structure and performance of Canadian industry to the weakness of competitive stimuli in the Canadian economic milieu. These findings are disturbing. They suggest that a number of policies which may have had the effect of sheltering domestic industry are perhaps in need of careful reassessment; and they make it quite evident that we have not been getting good value from our competition legislation.
Let's turn now to focus a little more closely on that legislation (prior to Bill C-2, the current amendments). The origin of present law can be traced back to an 1889 Act prohibiting conspiracies and combinations in restraint of trade. However, it was not until 1910 and the passage of the first Combines Investigation Act that machinery existed for the investigation of alleged offences. The intention of the 1910 Act, as Mackenzie King put it in his inimitable way, was "to prevent the mean man from profiting in virtue of his meanness". To this effect the legislation was replete with qualifications, some of which were retained through subsequent revisions. It is still the case that unlawful agreements and combinations are those which "unduly" lessen competition.
Over the years judicial interpretation has somewhat, if not entirely, clarified the meaning of some of these vague, references. Further to this end, one of the amendments introduced in C-2 is being added to confirm that the meaning of "unduly" does not entail proof that a merger or agreement will virtually eliminate competition.
Another characteristic of this early legislation was that it pertained only to some commercial activities--those involving goods. In the 1923 revisions to the Act, services were brought within reach of the law; however that change was short-lived and present legislation (i.e. before C-2) still applies only to articles and "article-related" services such as transportation and insurance.
During the Great Depression, price discrimination was brought into the Act for the first time. Then, during the 1950's, the competition law was broadened by the prohibition of resale price maintenance and an extension of the powers of the Director of Investigation to undertake general inquiries.
In the recent past the main change involved the insertion of provisions relating to misleading advertising. At the same time, however, the deficiencies of the legislation became increasingly apparent. It became evident that the Act did not provide the machinery to protect small businessmen against several forms of abuse by dominant suppliers, nor did it provide adequate protection for consumers against false market information. The only possibility for the recovery of damages suffered as a result of uncompetitive behaviour was to institute costly and highly uncertain criminal proceedings. Moreover, the legislation, with its basis in criminal law, provided for an inflexible approach which is ill-suited for dealing with several potentially beneficial business practices. In short, attempts to apply competition policy made it amply clear that Canadian combines legislation was badly in need of reform.
This same point comes through even more forcefully from an examination of developments in other industrialized countries. In the period since World War 11 there has been an unmistakable thrust among most of Canada's main trading partners for more rigorous implementation of competition policy. Japan, Australia, Britain, Germany, to name a few, and the EEC Commission itself have developed major new anti-trust legislation since the war. In Europe generally there has recently been a substantial increase in the number of anti-trust cases undertaken, and indication of a greatly enhanced commitment to competition. And in the United States, where the term competition has always had overtones of ideological zeal, restrictive practices are being pursued with increased vigour; a recent article in Business Week, for example, notes that the recent attack on price fixing in the United States "may prove to be unprecedented in breadth and intensity."
What these developments signify is that with respect to competition policy Canada has some considerable yardage to make up. Until Bill C-2 we had the dubious distinction of being the only industrial country to exclude services from our anti-trust legislation. While Canada remained confined by its strict adherence to a criminal law approach, European countries had rather successfully adapted civil law to the requirements of anti-trust policy, and the United States a combination of criminal and civil law. Canada's approach to mergers, moreover, raises some questions in the face of U.S. experience, which indicates the importance to, as it were, nip in the bud industrial formations which are likely to result in monopolies. As one distinguished expert has noted, when enterprises become large and powerful, attempts to control their power by anti-trust proceedings are few, and successes fewer.
Another serious limitation of Canadian policy is related to the operation of multi-national corporations. What has become of particular concern is the attempt by the United States government to extend its own anti-trust legislation to the operation of subsidiaries of American corporations located in Canada. This phenomenon of extraterritoriality raises both practical problems and fundamental questions about Canada's ability to assert its sovereignty. The failure of Canadian legislation to deal with this problem, and to help ensure that American anti-trust decrees do not frustrate Canadian policy objectives, had to be remedied.
And so, from several sources the message came through loud and clear that Canada's anti-combines machinery was in need of a fundamental overhauling. Bill C-2, which was passed by the House of Commons 'two weeks ago, is, as mentioned, only the first stage in the ,,government's response to these signals. In this sense the passage of C-2 represents only partial fulfillment of the process which was set in motion some nine years ago when the government requested the Economic Council of Canada to undertake a study of Canada's competition policy. The Council's recommendations formed the basis for Bill C-256, which was introduced in 1971 with the intention of providing an opportunity for widespread public debate. The decision to develop competition policy in two stages followed a subsequent recommendation by the Commons Committee on Trends in Food Prices. You may recall that the first stage was initially introduced into the Commons in 1973 as Bill C-227.
Now, at long last, part of the package of revisions planned for Canada's anti-combines legislation is (virtually) law. The highlights of Bill C-2 include: extension of the Combines Act's prohibitions to all services; the civil law reference of certain business practices to the Restrictive Trade Practices Commission for a determination of their effect on the public interest; the strengthening of consumer protection measures with regard to false market information and double ticketing; provision for the recovery of damages through civil suits; the strengthening of the prohibition against resale price maintenance; the prohibition of bid-rigging; authorization for the Restrictive Trade Practices Commission to deal with the matter of extraterritoriality.
In the very near future the government intends to proceed with the second stage of competition policy revisions. This will cover: mergers, monopolization, price discrimination, specialization and export agreements, and the reform of the Restrictive Trade Practices Commission. As in the case of stage one the proposals are being shaped by what we have learned from the deficiencies of present Canadian legislation, from foreign experience with competition policy, and from the findings of a number of studies on the structure and performance of Canadian industry. And, again, in designing the apparatus of competition policy we will be trying to achieve a judicious balance between the requirement for a flexible policy, one which lends itself to a consideration of the important factors that bear on efficiency in particular cases, and the requirement for legislation which is clear, and that can be easily and speedily applied. The final outcome of this entire rather prolonged process of revision should thereby reflect our effort to maximize the difference between the costs of competition policy, in terms of administrative overhead and the uncertainty and delay imposed on business, and its benefits, in terms of the potential contribution to the efficiency of the Canadian economy.
In closing, let me remind you that there is considerable evidence that Canada's industrial performance is not what it should be; indeed, in recent years our productivity growth has been lagging behind that of most other major industrial countries. These findings should be of major concern to us all. I would suggest, moreover, that they are indicative of the urgent need for a range of policies which can help spark the "creative dynamism" within the system and propel the forces of economic change. Not least among such policies, I would submit, are our efforts to mold competition policy into a more effective instrument.
Those of you who remain unconvinced of the need for these efforts might well take note of the response of Maurice Chevalier when he was asked how it felt to become 80. "Marvelous," he replied, "when I consider the alternative."
Our distinguished visitor and speaker was thanked on behalf of the audience by Sir Arthur Chetwynd, Bt., Immediate Past President of The Empire Club of Canada.