Chile: The toilet-paper tangle

IN OCTOBER Chileans discovered that for ten years they had paid over the odds for toilet paper because of a cartel linking the dominant suppliers, CMPC, a Chilean multinational paper and pulp firm, and a smaller rival.

IN OCTOBER Chileans discovered that for ten years they had paid over the odds for toilet paper because of a cartel linking the dominant suppliers, CMPC, a Chilean multinational paper and pulp firm, and a smaller rival. According to Chile’s competition authority, CMPC, with 80% of the market, colluded with its competitor, now owned by SCA, a Swedish company, to fix prices. A consumers’ association reckons that the two firms ripped off Chileans to the tune of $500m.

The revelation has caused a stir in Chile, for two reasons. The first is that CMPC’s chairman is Eliodoro Matte, the country’s third-richest man, with a fortune of $2.3 billion, according to Forbes magazine. He is a pillar of his country’s business community and a preacher of corporate social responsibility. He denies knowing of the cartel; he says that when he found out, thanks to an investigation in another country, he ordered his managers to confess. Nevertheless, the affair has smashed Mr Matte’s halo of corporate virtue. In an interview last month in El Mercurio, a newspaper, he adopted a quasi-Maoist tone of self-abasement.

The more important reason that this affair matters is that it is far from exceptional. In Chile in recent years regulators have discovered and punished price-fixing by pharmacy chains and poultry producers, for example. While Latin America’s private sector talks of the virtues of free markets, too often it practises the vices of monopolies and cartels. Other corporate sins include cronyism and rent-seeking in which profit derives from political connections rather than competitive excellence, as the corruption scandal at Petrobras in Brazil illustrates. Foreign multinationals often imitate rather than challenge their local rivals.

Most Latin American countries threw open their economies by slashing tariff barriers in the 1980s and 1990s. But that was not enough to ensure healthy competition. Even for tradable goods, let alone services, small and remote national markets lend themselves to oligopolies. Rigged markets don’t just hurt consumers. They are a development problem. The World Bank finds that a lack of competition is associated in Latin America both with income inequality and lack of innovation.

Attempts to promote competition are growing. Chile is a pioneer: it has set up a specialised competition tribunal, and rewarded rulebreakers with lighter or no punishment if they have snitched on their co-conspirators.

Mexico, which was long notorious for monopolies, is now fighting them. The government of Enrique Peña Nieto set up a new telecoms regulator to implement a law that has forced América Móvil, whose main owner is Carlos Slim, the world’s second-richest man, to cut its charges. This law has encouraged AT&T to enter Mexico, presenting Mr Slim with a heavyweight competitor for the first time.

The government has also beefed up the Federal Competition Commission, which regulates all markets except telecoms. It is investigating possible cartels in eggs, sugar, private pension funds and airport slots, according to Alejandra Palacios, its director. It has the power to block mergers that create monopolies and to make recommendations, such as one that encouraged Mexico City’s government to allow Uber to operate its car service.

Brazil, too, recently reformed its competition agency to make it speedier and more effective. Other countries in the region are lagging. Peru so far has no provision to prevent market concentration: SABMiller held 96% of the beer market there even before its recently agreed merger with AB InBev (which has the other 4%), while Grupo El Comercio controls around 75% of the newspaper market. Peru may soon set up a stronger competition agency because its free-trade agreement with the European Union requires it to, says Tania Zúñiga-Fernández of ESAN, a business school in Lima. But she adds that passing a law is just the start. Implementing it means finding qualified professional staff.

There is a risk of regulatory populism. Some competition experts questioned Mr Peña’s competition law because it includes provisions to force powerful firms to divest in some circumstances. But Ms Palacios says these are “a last resort” and that they exist in Britain, too. Others argue that prior approval of mergers may impose more costs than benefits in small markets. But that sounds self-serving.

Capitalism in Latin America needs defenders, sometimes against the capitalists themselves. That should be the role of the new breed of regulators. Their work should remind the region’s business people that the prime corporate social responsibility is to comply with the law.

The Economist |

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