How increasing competition can reduce poverty

The role of policies that ensure and promote competition in the marketplace have moved to the forefront of economics and the development agenda. The Australian G20 presidency highlighted competition as one of the four policy areas for the growth agenda. India’s prime-minister Modi has placed competition on his transformational reform agenda, and The Economist recently emphasized the lack of competition as a source of low productivity among Latin American firms. Jean Tirole, who won the latest Nobel Prize for his analysis of market power and regulation, demonstrated how competition policies can spur powerful firms to become more productive and can give smaller firms more opportunity to thrive.

To respond to client demand at this crucial moment for economic development, the World Bank Group is generating knowledge to better understand the links among competition, growth and shared prosperity, and to develop policies that promote competition. Last week, at a Bank Group event, held jointly with the Organization for Economic Cooperation and Development (OECD), experts and practitioners discussed the growing body of empirical evidence on these matters. Representatives from the WBG’s client countries, in turn, shared how WBG competition policy tools are leveraging their development impact.

Competition in the marketplace matters for economic growth and household welfare for two reasons:

• First, it fosters more productive firms and industries, allowing domestic firms to become more competitive abroad and to export more. A WBG study shows that substantially increasing competition in Tunisia would boost labor productivity growth by 5 percent.
• Second, it protects poorer households from paying too much for consumer goods, and from missing out on the benefits of trade liberalization. In Mexico, lack of competition costs the poorest households 20 percent more than richest households. In Kenya, poverty could fall by 2 percent if competition was more intense in the maize and sugar markets.

Competition is restricted by businesses practices that undermine competitive dynamics. When firms agree to fix prices, empirical evidence reveals that consumers pay on average 49 percent more, and 80 percent more when cartels are strongest. Developing economies are still frequently marked by regulations that restrict the number of firms or limit private investment; rules that increase business risks and facilitate agreements among competitors; and rules that discriminate against certain competitors or affect competitive neutrality. When new retail firms are allowed to enter the market, real household income increases by 6.2 percent.

If effective, competition policy guarantees that competition is not restricted in such a way as to reduce economic welfare. The WBG has been learning important lessons on how to effectively promote competition in developing economies.

• A mandate is good but not enough. Nearly 120 countries have active or developing competition laws, often put in place with the WBG’s support. Many sector regulators have a mandate to safeguard competition, too. Yet the legal mandate often does not translate into effective use of enforcement tools; in certain cases, the implementation can actually burden investments and raise the risk of doing business. The WBG’s Trade and Competitiveness Global Practice (T&C) supported the government of Kenya so that control of merger and acquisitions (M&A) becomes more targeted. This reduced the unnecessary financial burden for firms involved in M&As by 70 percent. It also allowed the authority to focus on the most harmful anticompetitive practices, such as cartels among insurers and supermarkets.
• Competition principles are relevant in broader public policies. Governments implement public policies to promote higher rates of innovation, investment and employment. When fiscal and non-fiscal incentives are granted only to a few firms in the market, this can distort the level playing field and prevent even the most efficient firms from thriving. Moreover, governments pursue valid public policy objectives to ensure consumer health, public safety and curb pollution. These objectives are important and should not be viewed as conflicting with competition policy. Instead, competition principles can help select the regulatory solutions that are less restrictive. For instance, to avoid road accidents, setting safety standards for vehicles is less restrictive to competition than limiting the number of transport operators. T&C’s support to the Philippines’ Maritime Authorities amended rules that allowed existing shipping operators to preempt entry of a new competitor. In Honduras, T&C advice on fostering less discretional rules for fertilizer registration led to more competition and prices of fertilizers dropped by as much as 10 percent.
• In order to do more good than harm, competition policy makers and enforcers need a sound understanding of markets. In competition, there is typically more than meets the eye: Large market share is not equal to market power nor dominance; similar price movements can either be a sign of efficiency or of a cartel; and higher prices can either be a signal of quality or of a lack of competition. Understanding what influences market outcomes and how business behave should be a priority. For policies toward the twin goals, this implies that ­– as Tirole’s work highlights – “the best regulation or competition policy should be carefully adapted to every industry’s specific conditions.”
• Actual changes on the ground require political wit and tailored solutions. Competition policy reforms ­– by definition­ –  hurt the interests of few and benefit many. Generating a pro-reform consensus requires political champions, clever advocacy and strategic partnership with stakeholder groups and the media. At the WBG, we support this policy dialogue by developing new data on Product Market Regulation in 20 developing countries, jointly with the OECD. We foster the exchange of knowledge on successful reform experiences with such special initiatives as the Competition Advocacy Contest in partnership with the International Competition Network.

Overall, experts in T&C already work with 40 governments and numerous regional and global partners to improve competition policy and to foster reforms economy-wide and in targeted sectors. We are committed to expanding and deepening this work even further while maximizing its impact toward achieving the WBG’s twin goals of eliminating extreme poverty and promoting shared prosperity. The results will help untangle some of the knots that limit the potential for economies to grow, to become more productive and to become more inclusive.

This post first appeared on the World Bank’s Private Sector Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Anabel Gonzalez is Senior Director at the World Bank Group Global Practice on Trade and Competitiveness. Martha Martinez Licetti leads the Competition Policy Team for the Trade and Competitiveness Global Practice at the World Bank Group. Tanja Goodwin is an Economist in the Trade and Competitiveness Global Practice of the World Bank Group.

 Image: A man is seen standing in front of an image of the earth. REUTERS.