Competition Markets Authority
Its a pleasure to be speaking at the Regulators Forum, and in such magnificent surroundings here at the British Academy.
Id like to talk today about how open, effective competition and targeted, effective regulation can together help to drive economic growth and productivity.
The UKs weak economic performance is understandably the subject of much debate for people, it is holding back living standards; for business, it is holding back demand; and for government, it is holding back tax revenues necessary to deliver high-quality public services.
And its often argued that regulation, and regulators, are part of the problem. That investment and innovation is held back by excessive intervention. That by virtue of their duties, or their culture, or their absence of political accountability, regulators are not meeting the moment. That they are not responding in the way they should to our economic circumstances.
Often, these points are made with broad brush strokes in a way that rather lazily puts not only all the sector-specific regulators, but also other authorities in the UKs economic landscape, such as the Competition and Markets Authority (CMA), into one big bucket.
Now, it is right to focus attention on how the regulatory regime can deliver stronger growth.
And all public bodies the CMA included need to ask, and be asked, no-nonsense questions about what each of us are doing to support growth.
But it is important that we do so clear-mindedly. If we start from misguided presumptions, with a simplistic one-size-fits all mindset that all regulation is always by its nature harmful to innovation for example; or that competition can only be achieved through complete laissez-faire then we will arrive at the wrong solutions.
To unpack this, Id like to make 5 key points.
First, that open, competitive markets are vital to economic growth, by providing incentives for firms to invest and innovate to get ahead of their rivals. This point is generally accepted in principle, but the tangible implications are often overlooked, or undermined by vested interests, in practice.
Second, that keeping markets competitive isnt the same thing as leaving them alone. Parliament has given the CMA a duty precisely to help create and protect the competitive conditions that foster innovation and growth, by giving it functions to prevent anti-competitive mergers, and to enforce competition and consumer protection law.
Third, not all markets are the same. Different markets have differing economics, bases of competition, and systemic impact. Some require additional measures in effect, regulation in order to create, unlock or substitute for competitive conditions that are otherwise lacking. It is important, in the search for growth-enhancing regulatory reforms, to distinguish measures that are pro-competitive and so pro-growth, from those that are not.
Fourth, that the institutional environment of an economy matters; and that the understandable instinct to impress greater political direction on regulators should not blind us to the benefits of long-term certainty and predictability that come from independence from short term political expediency and from lobbying by vested interests.
And finally, that the regulatory regime needs accountability commensurate with the powers it exercises over the economic lives of citizens and businesses. This is something the CMA wholeheartedly embraces, indeed actively encourages. Without accountability, we cannot command the trust and confidence necessary to use our functions and powers effectively.
Many of these points will no doubt be obvious to those in the room today. But in different ways, they are all being called into question partly from our economic predicament, partly by the pace of technological change, and partly because, as will always be the case, what benefits the country as a whole over the long term can be specifically inconvenient to some, often powerful, vested interests in the short term.
Competitive markets are vital to economic growth
So lets start with my first point, why open, effective competition is so important to economic growth.
The evidence is clear. When firms dont face strong competition, they can take their customers, market share and profits for granted. They face no pressure to innovate; no incentive to operate more efficiently. High-productivity firms dont drive out low-productivity ones. And we are all poorer as a result.
This is not just what the aggregate numbers that look at these relationships across the economy tell us. More tangibly, its patently true all around us. Just look at markets where competition is lacking, and markets where competition thrives. The benefits to growth of the latter are obvious.
Take airlines for instance. When the EU liberalised the air transport market in the early 2000s, it boosted competition: new airlines entered, fares fell, new services were introduced. Consumers benefited through lower fares and greater choice, and also the wider economy through greater connectivity and better capacity utilisation.
Take banking. The CMAs open banking remedy has enabled customers of the large retail banks to share their data with trusted third parties. The result was a dramatic growth in the fintech sector, as startups emerged to provide new, innovative digital services to consumers and businesses, helping them get more out of their money. Again, this benefited customers over 8 million of them. And it benefited the wider economy through new sources of value estimated at 4bn a year and growing.
Do I need to mention telecoms. Those of my generation will remember the performance of BT as a state monopoly: 12-month waiting lists to be connected; appalling reliability. When it was opened up to competition in the 1980s waiting lists ended, call failures fell from one in 25 to one in 200, benefiting not only customers directly but the wider economy though better-functioning infrastructure (footnote 1). Its the same story in the US, where the FTCs breakup of AT&T prompted not only fall in consumer prices, but a wave of innovation (footnote 2).
The same is true for other essential infrastructure, where firms in highly concentrated markets have failed to innovate, simply because theyve faced no competitive pressure to do so. For example, the CMA recently concluded that the emergency services communications network was effectively being run as an unconstrained monopoly. This led to higher prices than we would expect were the market competitive, ultimately paid for by the taxpayer, but also critically from a productivity and growth perspective delays to the rollout of a new, better network, because the monopoly provider simply wasnt incentivised to support the transition.
Protecting and promoting effective competition
So we are clear that competitive markets are key to growth and productivity, as well as to other good outcomes for businesses and consumers. At that level of abstraction, this is surely uncontroversial.
But what does this mean in practical terms?
Well, keeping markets competitive is not the same thing as leaving them alone. For centuries, its been recognised that businesses will naturally try to escape competition in the pursuit of returns. And they can do this in beneficial, pro-growth ways, for example by innovating (as Schumpeter recognised); or they can do it in harmful, anti-growth ways for example, by colluding (as Adam Smith warned about), or by excluding or acquiring their competitors.
And it is precisely to channel those business incentives away from practices that are harmful to people and the economy, and towards those that are beneficial, that Parliament enacted the legislation supported and updated by successive governments that gives the CMA the functions and powers it has today.
I will talk a bit about what that involves in practice. But before I do, I should say that, conceptually, I think its unhelpful to characterise those functions as regulation. It does not involve rulemaking for particular markets or sectors. On the contrary, it is the application of a cross-economy framework designed to preserve and promote effective competition. Applied effectively, this removes the need for regulation, since effective competition is in itself the best regulator.
So what are the practical implications? In summary, those are: pro-competitive merger control; the enforcement of laws against cartels and the abuse of dominance; and the enforcement of consumer protection law. The CMA also has tools to look across markets and to take steps when those markets are not working well that I will touch on briefly.
Pro-competitive merger control
The need for merger control should be self-evident. Without it, firms could freely acquire market power through consolidation. Value-creating for them, at least for the medium-term. Dreadful for growth.
But of all our functions, merger control tends to attract the greatest amount of outside noise. Often, this comes from the handful of firms whose mergers are blocked. But the loud criticisms sometimes made in the immediate aftermath that we are holding back growth and innovation, for example, or misunderstanding commercial realities are not generally borne out by the evidenc