Disruptive innovation and competition in Latin America and the Caribbean

forumIn the run-up to the Latin American and Caribbean Competition Forum in Mexico-City on 12-13 April 2016, James Mancini, OECD Directorate for Financial and Enterprise Affairs looks at the competition enforcement challenges and advocacy opportunities around disruptive innovations in Latin America and the Caribbean

”Disruptive innovation” is a popular term among researchers, businesses, consultancies and journalists discussing market change. While there is some debate about the precise application of the term, the phenomenon it describes is redefining markets around the world and the Latin American and Caribbean region is no exception. Disruptive innovations in the region are fundamentally challenging traditional business models and regulatory frameworks.

Several recent examples originate from mobile technologies introduced by both large players from outside the region and locally-developed businesses. With respect to mobile taxi-hailing applications, for instance, Uber competes with local companies such as Tappsi and Easy Taxi. Financial services innovations in the region also use web and mobile technologies to target segments of the population that are cut out of traditional markets. These innovations include the development of alternative credit scores using social media and transaction data (e.g. mobile telephone top-ups), allowing low-income individuals without borrowing history to access loans that would otherwise be unavailable. Other innovations include low-cost remittance services that offer payment via utilities companies and gift cards, and mobile telephone-based electronic payment services that may evolve into a wider range of financial services. In both the financial and taxi sectors, disruptors face incumbents with established business models and extensive regulation.

In this environment, competition authorities have an opportunity to ensure that disrupted markets remain competitive ones, and therefore that consumers will benefit from innovation. This will require both conventional and novel approaches.

Competition authorities should first ensure that competition laws are enforced in disrupted markets as they are in any other market, despite the challenges that may arise. This requires an understanding of the economics underlying enforcement tools rather than the rigid application of rules of thumb. For instance, when defining a market (the prerequisite for analysing competitive effects), competition authorities are challenged by rapidly-changing markets whose boundaries may not be clear. Both overly broad and overly narrow approaches to this exercise carry significant risks of which authorities must be aware. Two-sided markets (e.g. markets for platforms that allow buyers and sellers to transact[1], such as Airbnb and eBay) must be recognised and analysed using methodologies that do not simply treat each side as a separate market. Authorities also need to be alert to more typical issues, such as disruptors abusing a dominant position in a market and incumbents engaging in anticompetitive conduct to prevent disruptor market entry. Anticompetitive acquisitions of disruptive innovators by incumbents need to be prevented. While new approaches may be required to identify these acquisitions, they should be dealt with using established approaches.

Authorities should also advocate in favour of competition when disruptive innovations affect regulated markets, which they often do by operating outside of existing regulatory frameworks. The avoidance of regulation is core to the business model of some disruptive entrants who seek to innovate in markets where regulation favours the status quo. As disruptors begin to capture segments of existing markets, incumbents call for regulations to be applied equally. This can have significant implications for the ability of disruptive innovations to produce consumer benefits. Sector regulators therefore face the challenge of balancing fairness, consumer protection, the promotion of competition and any other goals their regulation seeks to achieve.

Often, however, regulators are unwilling or unable (without legislative change) to unilaterally adapt to, or choose to ignore, innovative new entrants to their respective markets. As a result, the default response is often to attempt to prevent the operation of disruptive innovations, as has generally been the case with Uber. This approach probably has the greatest impact on smaller disruptive entrants without the resources to pay fines and undertake legal action to gain market access. In this context, competition authorities can consider being a part of, or triggering, an evaluation of existing regulatory frameworks, making use of their advocacy toolbox in order to ensure that competition and innovation are kept at the forefront.

There are many potential tools available to authorities to undertake competition advocacy in regulated markets, depending on the powers granted to them by legislation. Market studies can play a role in the early identification of competition issues and in enhancing knowledge of a market. To this end, the OECD is working with Chile, Colombia, Costa Rica, Mexico, Panama and Peru to help these jurisdictions develop their market study methodologies. In some cases, however, the identification of markets on the verge of, or undergoing early-stage, disruption can be challenging. Holding preliminary open hearings with interested stakeholders and tasking authority staff with monitoring markets for potential disruption are potential solutions, although authorities may wish to ensure that such efforts do not detract from traditional enforcement resources. Authorities can also engage in regulatory advocacy, commenting on proposed regulation and participating in the design of regulatory frameworks in response to market disruption, including the reduction of competition-limiting regulation and the development of new pro-competitive measures.

Competition authorities can also play a role in fostering collaborative links between disruptors and regulators. This encourages transparency over conscious non-compliance with regulations and can enable regulators to consider adapting their approaches to disruptors in a proactive way, rather than responding to violations in an atmosphere of controversy. As a result, outright bans on disruptor activities could be avoided in favour of regulatory adjustments. Adopting a facilitative advocacy approach could be advantageous for competition authorities in terms of encouraging the resolution of regulator/disruptor conflicts, avoiding the stifling of competitive innovations through regulation, and facilitating a broader assessment of the need for certain sector regulations given their competitive impact. Such efforts can benefit regulators, market participants and, ultimately, consumers. The OECD’s Competition Committee has identified “digital economy and innovation” and “market studies” as strategic priorities for its work over the coming years in order to help promote this outcome.

Useful links

This post is based on a background paper for a session on disruptive innovations in the Latin America and Caribbean Competition Forum (12-13 April 2016)

OECD work on market studies in Latin America

[1] For further information regarding two-sided markets, please see, for instance, Rysman, Marc (2009), “The Economics of Two-Sided Markets”, Journal of Economic Perspectives, 23(3), https://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.125.

The doctor will see you now (if you turn on the video)

health workforceMark Pearson, Deputy Director, OECD Directorate for Employment, Labour and Social Affairs. Also published by Europe’s World

An elderly man with cardiovascular disease tests his own blood pressure, and sends the results to an online application that his doctor can access. Another patient with depression living in a rural area far from health services tells a psychiatrist how he is feeling via a video connection. All of this occurs without the patients leaving their homes.

These scenarios may sound like something scripted by writers of science fiction, but such ‘telehealth’ has the potential to bring high-quality and specialised care to previously underserved populations. Studies indicate patients respond positively to using the technology, and it increases access to health services. Health professionals report that it reduces the need for patient visits, and assists with clinical decision-making. There is also evidence suggesting that telehealth can improve patients’ ability to manage their own health, not to mention lower the cost of healthcare through fewer hospitalisations.

Despite this clear advantage, health systems have yet to abandon their hospital-centric approach to care. If telehealth is such a good idea, why is not being given wide support? One of the most intractable problems holding the service back is a much-needed rethink of the types of workers we will need in future health systems.

Up until now, much of the discussion on the healthcare workforce has centred on the shortage of doctors or nurses. It’s true that many doctors in particular are approaching retirement and will soon need to be replaced. An OECD report released this month shows that countries have substantially increased their training of doctors and nurses, and the numbers are growing. But this is an expensive approach. A recent report by the UK’s National Audit Office has indicated it takes three years and costs about £79,000 to train a nurse, ten years and £485,000 to train a general practitioner, and 14 years and £727,000 to train a specialist. These huge investments deliver healthcare professionals with astonishing skills, but regrettably we do not always take advantage of these skills wisely.

There is evidence of a considerable skills mismatch in the health sector, with a large proportion of health workers over-qualified for the work they do. The 2011-12 OECD Programme for the International Assessment of Adult Competencies survey showed that between 70-80% of doctors and nurses report being over-qualified for some aspects of their work. This suggests an inefficient use of their time and a waste of human capital. To be blunt, is it really worth ten years of training someone to spend much of their day looking into children’s ears to confirm that they are a little bit red and might require some basic antibiotics? Is there not a way their skills could better serve the population’s health?

At the same time, after all that training, about 50% of doctors and 40% of nurses report being under-qualified for some of the tasks they have to do. Education and training programmes need to transform so as to make health workers ‘fit for practice’. The outlook at present is discouraging, as many health programmes teach little about the skills we know to be needed in future systems such as ICT and people management.

Perhaps the biggest challenge will be to rethink ‘who does what’ – or ‘scopes of practice’ in the health jargon. This means letting appropriately-trained clinicians perform tasks they were previously not permitted to. The most common example of this is the nurse practitioner. In some countries, these more advanced nurses, who usually have a Master’s qualification, can prescribe limited medication and order diagnostic tests under controlled conditions. An OECD review in 2010 showed that advanced-practice nurses are able to deliver the same quality of care as doctors for a range of patients. Most evaluations find high patient satisfaction, mainly because nurses tend to spend more time with patients as well as provide more information and counselling.

Is it so difficult to imagine that diabetes workers, when backed with strong ICT support and clear protocols about what to do when symptoms are not within a prescribed range, can be trained to ensure that treatments are followed correctly, leaving those with more expertise to focus their attention on problematic cases? The barriers to realising this vision remain considerable. There are strong lobbies against change, particularly by professional associations. Policymakers need to engage these groups boldly, so they too can begin to see change as the tremendous opportunity to gain new skills and focus on what they do best, rather than succumbing to the impulse to feel threatened.

Traditional roles and responsibilities need to transform, and alongside them so do the antiquated ways of thinking. The evidence base for change is growing, but it needs to be matched by a growing political will. The question is, are governments bold enough to meet the challenge?

Useful links

OECD health statistics

OECD health workforce project

Health workers with right skills in right places needed

Health policies and data from the OECD

Illicit Trade’s Deadly Margins

IntegrityForum-600x400px-TwitterBill Below, OECD Directorate for Public Governance and Territorial Development (GOV)

Diethylene glycol, or DEG, is a colourless, odourless organic compound with a sweetish taste that can, in a very limited way, pass for glycerine, a common ingredient in food and pharmaceutical products. Its substantially lower price and its ability to masquerade as glycerine have not been lost on some. Indeed, in a drum with the proper (counterfeit) labels, or in an industrial process such as say, a pharmaceutical manufacturing line, DEG looks and acts like glycerine. In the last ten years, DEG has found its way into cough syrup in Panama, teething medication in Lagos, toothpaste in Spain and in other pharmaceutical and food products. But DEG is not just a cheap substitute for glycerine, it is poison. When ingested, it attacks the kidneys first, then the central nervous system. The result is often death. In fact, DEG is antifreeze.

Global revenues from all illicit trade combined have been estimated at USD 870 billion per year, or 1.5% of global GDP.[1] Counterfeiting, a subset of illicit trade, produces revenues of several hundred billion euros per year as estimated in the OECD’s upcoming publication Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact. Meanwhile, the counterfeiting of prescription and, increasingly, over-the-counter remedies, is a rapidly growing, highly lucrative and, as we shall see, devastating specialisation.

Like the knockoffs they peddle, counterfeiters create elaborate parallel worlds that employ armies of technicians, skilled labourers and other workers, that implement sophisticated manufacturing operations and distribution chains, and that court investment and reward investors, often handsomely—at least for a time. But it remains a universe in the shadows, detached from the rule of law and relying on a whole constellation of criminal practices to function, including bribery, forging, money laundering, organized crime, environmental crime, intellectual property rights infringement, illicit labour practices, tax evasion and reckless endangerment of human life. The list goes on.

But antifreeze in cough syrup? Really?

The tragedy may have happened a decade ago, but the aftermath lives on. Only in part because now, ten years later, as this is being written, the trial in Panama is entering its eighth day. Understanding the sequence of events and actors involved gives us a glimpse into both the complexity of illicit trade and the challenges of eradicating it.

Before the DEG was unwittingly mixed into 260,000 bottles of cold medicine, before the widespread pain and suffering began that ended with over 300 reported deaths, 46 drums of poison labelled as medical-grade glycerine sat in a broker’s warehouse in Colón, Panama, as if to offer one last and extended chance for catastrophe to be avoided. In fact, the drums had sat there so long, their expiration dates had come and gone. The court’s evidence shows that the broker changed the dates and by doing so saved his investment but removed one of the last remaining barriers to tragedy.

Two years earlier, on the docks of Colón, the same broker had filled in a customs form describing the contents of the shipment not as poisonous DEG but as “pure glycerine”. The circumstances and responsibilities related to that transformation is one of the subjects of the present trial. When a buyer was finally found—the Social Security Fund of Panama—the drums were shipped to its state-run manufacturing facility in Panama City. There, the contents were mixed into production lines for a number of cold remedies, including cough syrup. The tainted bottles and packages then entered normal distribution channels, fanning out across the country in anticipation of flu season. Soon, an inexplicable number of emergency patients were filling Panama’s hospitals and wards, exhibiting similar symptoms—acute kidney failure and paralysis. Half would die.

It might have been a simple but murderous case of arbitrage, that is, profiting from the price difference between a legitimate product and a knockoff—something worthy of a modern-day Harry Lime. But according to the broker, his company was a victim, too. What is certain is that the true nature of the contents of those 46 barrels should have been detected prior to production—no matter what the circumstances. According to court documents, a quality control laboratory examined the toxic diethylene glycol on two occasions, first as a raw material and then as part of a finished drug product. On both occasions, the laboratory certified that it complied with the legal requirements for human consumption.[2] Whether there was criminal intent or criminal negligence will be determined at the trial. What we do know is that samples from the drums revealed traces of sorbitol and sugar, additives that may have been introduced at the source to produce falsely reassuring test results (Schier, 2009)[3]. Whatever the case, even before an act of deliberate counterfeiting is pinpointed, deadly deficiencies in the supply chain are apparent.

The globalisation of trade and the advent of the Internet has made it possible to source products, ingredients, compounds and components around the world, creating complex and dynamic value chains. This can be a boon to trade but it has its downsides. It can encourage ad-hoc relationships with distant and little-known suppliers based solely on price rather than quality, trust or accountability. The sheer complexity of supply chains, their global breadth and the fragmented landscape of regulatory control across jurisdictions can multiply the entry points for unscrupulous actors.

Today’s supply chains are without borders, and that goes for both legitimate and corrupt ones. The broker in Colón, Panama sourced his order from an agent in Barcelona, Spain in July of 2004. The Spanish broker produced a certificate of analysis (COA) printed on its own letterhead, attesting that the shipment contained 99.5% pure “TD” Glycerine. Middlemen are not required to test the products they sell. That responsibility falls to the original product manufacturer and the manufacturer of the end product. Yet all references to the provenance of the shipment and the original COA had been removed, a pre-emptive tactic used by certain middlemen to protect business. There was no way to assess the origins and value of the COA, and every reason to thoroughly test the product prior to production of the end product.

Did the agent in Barcelona knowingly switch the label from DEG to medical-grade glycerine? Again, possibly not. His source, an agent in Beijing, also produced a certificate of analysis attesting to 99.5% pure “TD” Glycerine, also on its own company letterhead with no mention of the origin of the shipment or documentation.

Along with freight forwarders and customs officials, third parties are amongst the weakest links when it comes to integrity risks in global trade. While middlemen can provide valuable local knowledge and lower the cost of negotiating, 75% of bribery cases of foreign public officials involved intermediaries, according to the 2014 OECD Foreign Bribery Report. Unscrupulous agents, consultants, distributors or suppliers can use bribes to bypass health and safety requirements, avoid licensing and otherwise evade legitimate law enforcement, creating significant additional liability risks related to product safety, as the case of Panama so tragically demonstrates.

So where was the smoking gun? The original certificate of analysis was “produced” by the manufacturer of the DEG, a factory near the Yangtze Delta with a phony web site and no registration to produce pharmaceutical grade glycerine. Leaving the factory, the drums were labelled “Glycerine” giving a batch number and weight. As the shipment made its way from the port of Shanghai to Colón, Panama, a second label appeared on the drums marked “glycerina pura”. In a kind of gruesome coda to the affair, the New York Times, whose Pulitzer Prize-winning investigative reporting played a crucial role in bringing many of the case’s facts to light[4], was able to uncover what no one had bothered to ask: the meaning of “TD” in the product name.

It was an obtuse English phonetic abbreviation for the word “Substitute” in Chinese.

The outcome of labelling a product “99.5% pure substitute glycerine”—the equivalent of labelling a box of powdered arsenic “pure sugar substitute” and placing it on a grocery store shelf—was mass death and suffering. How humans subsequently chose to handle that ambiguity may say as much about human nature as it does about the vulnerabilities and risks associated with modern global supply chains.

China has made strides in recent years in cracking down on counterfeit and illicit trade. Yet global illicit trade is bolder and more sophisticated than ever. The 2016 OECD Integrity Forum – “Fighting the Hidden Tariff: Global Trade Without Corruption”, taking place at the OECD Conference Centre in Paris from April 19-20, is a leading public forum on integrity and anti-corruption worldwide, bringing together different policy communities as well as the private sector, civil society organisations and academia. Join us and discover from leading front-line experts, policy makers and researchers how illicit trade continues to evolve as well as the strategies for containing it.

Useful links

Fighting the Hidden Tariff: Global Trade without Corruption (2016 Integrity Forum Background Report)

OECD work on Illicit trade

OECD work on Fighting Corruption in the Public Sector

OECD work Bribery & Corruption

[1] United Nations Office on Drugs and Crime – UNODOC, 2012

[2] http://www.newsroompanama.com/news/panama/13-for-trial-in-health-scandal-that-killed-291

[3] http://www.ncbi.nlm.nih.gov/pubmed/19597445

[4] http://www.nytimes.com/2007/05/06/world/americas/06poison.html?_r=0