Linkages Between Competition Policy, Competitiveness &

Economic Development

ByR. S. (Shyam) Khemani

Principal, MiCRA, Washington DC, andConsultant-Advisor, Competition Policy,

Foreign Investment Advisory Services (FIAS)The World Bank Group, Washington DC

Email contact: sk@micradc.com,rskhemani@worldbank.org

Presentation at CUTS & INCSOC Seminar on “Enhancing Development Through a Competitive Culture”

August 14, 2008New Delhi

Some Commonly Observed Industrial Characteristics of Developing

Economies•High levels of ownership concentration•‘Missing middle’ sized firms•Conglomeration•Lack of ‘Market for Corporate Control’•Under-developed equity-debt markets•Close government-business relations/connections•High levels of product (&financial) market concentrationThese factors tend to self re-enforce each other.

COMPETITION CAN BE THWARTED

“The corrupt version of capitalism—when powerful corporations deliberately try to eliminate healthy competition to preserve their privileged position—generates economic inefficiencies and social injustice, thereby undermining political support for the free-market based system….”

(R. Rajan & L.Zingales, “The Road to Prosperity: Saving Capitalism from Capitalists, Transition Newsletter, 2003)

Domestic Competition & International Competitiveness

Michael Porter in The Competitive Advantage of Nations (1990) has observed that :

“Few roles of government are more important to the upgrading of an economy than ensuring vigorous domestic rivalry. Rivalry at home is not only uniquely important to fostering innovation but benefits national industry…..In fact, creating a dominant domestic competitor rarely results in international competitive advantage. Firms that do not have to compete at home rarely succeed abroad. Economies of scale are best gained through selling globally, not through dominating the home market” (page 662).

COMPETITION NEEDS TO BE Safeguarded and Sustained

• The ‘Competitive Process’ is not automatic.• Competition can be distorted by public policies and restrictive business practices.• Public policy often manipulated by various interest groups including private sector firms• Entrenches anticompetitive business practices and policies•Discourages both domestic and foreign investment

What Constitutes Effective Competition Policy ?

Policies that foster inter-firm rivalry and entry by• “Preventing Anticompetitive Practices.” and … “Promoting Competition” Calls for enactment of Competition (Antitrust) Law to address both Private Sector Restrictive Business Practices & Public Policies that unnecessarily impede competition substantially, Requires Specialized Agencies, Effective Policy Design and Implementation.

Table 1Number of Countries with Competition Laws (CL)

by Regions

AfricaNo of countries: 47 + 3 regional integrations

East Asia and Pacific No of countries: 32

Latin America and Caribbean +North AmericaNo of countries: 35 + 2 regional integrations

Europe and Central AsiaNo of countries: 57 + 1 regional integration

Middle East, North Africa No of countries: 21

South Asia No of countries: 8

No of countries with a Competition Law: 17 (including regional integrations)

No. of IDA countries: 11/39

CL: 13

No. of IDA countries: 4/13

CL: 19(including regional integrations)

No. of IDA Countries: 2/9

CL: 47(including regional integrations)

No. of IDA Countries: 8/10

CL:7

No. of IDA Countries: 0/2

CL: 3

No. of IDA Countries:3/8

Competition (Antitrust ) Law & Policy

• Distinction between Systemic vs. Industry/Case Specific Impact.• Removing Public Policy Restraints: Tariffs & Non-Tariff Barriers to Trade, Restrictions on Ownership-Investment, and Other Such Policies Systemic Impact.• Competition (Antitrust) Law--Case by Case Application Firm/Industry Impact. • Complementary Buttress Each Other.

GD

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competition3 4 5 6 7

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Figure 1Competition, Entry and Economic Growth

Source: World Economic Forum and World Bank SIMA Indicators. “Competition” is the average response in each country to the question “In most industries, competition in the local market is (1=limited and price-cutting is rare, 7=intense and market leadership changes over time).” “Entry” is the average response to the question “Entry of new competitors (1=almost never occurs in the local market, 7=is common in the local market).”

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competition3 4 5 6 7

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entry4 4.5 5 5.5 6

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competition3 4 5 6 7

-5

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entry4 4.5 5 5.5 6-5

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Figure 1Competition, Entry and Economic Growth

Source: World Economic Forum and World Bank SIMA Indicators. “Competition” is the average response in each country to the question “In most industries, competition in the local market is (1=limited and price-cutting is rare, 7=intense and market leadership changes over time).” “Entry” is the average response to the question “Entry of new competitors (1=almost never occurs in the local market, 7=is common in the local market).”

Figure 2Per Capita GDP (constant 2000 USD in thousands) and Intensity of Competition in Local Markets

Source: Global Competitiveness Report 2006-2007 and World Bank DDP, 2005

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Intensity of Local Markets Competition

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High

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Low Intensity High Intensity

Figure 3Effectiveness of Competition (Antitrust) Law- Policy and the Extent of Market Dominance

Source: Global Competitiveness Report 2006-2007

Effectiveness of Competition (Antitrust) Law-Policy

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ent o

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IDA Non-IDA countries

Low Dominance

Low Effectiveness

High Effectiveness

High Dominance

Figure 4 Business Competitiveness Index and Effectiveness of Competition (Antitrust) Law-Policy

Source: Global Competitiveness Report 2006-2007

Effectiveness of Competition (Antitrust) Law-Policy

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eti

tiv

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IDA Non-IDA countries

High

Low

Low Effectiveness

High Effectiveness

Figure 5Intensity of Local Markets Competition and Effectiveness of Competition (Antitrust) Law- Policy

Source: Global Competitiveness Report 2006-2007

Effectiveness of Competition (Antitrust) Law-Policy

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IDA Non-IDA countries

Low Effectiveness

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Competition, Cooperation, and Competitiveness

•Exemptions-Exceptions Granted Under Competition law-Policy•R&D Cooperatives•Standardization•Specialization & Rationalization Agreements•Information & Statistical Exchanges•JVs Strategic Alliances, M&A …•Export ‘Cartels’

Constraints to Promoting Competition

• Lack of Political Will/Competition Culture.

• High Industry/Market and Ownership Concentration in Product & Financial Markets.• Entrenched Firms & Other Stakeholder-Interest Groups Lobbying, Rent-Seeking Behavior, Corruption & Bribery……• Underdeveloped Capital & Financial Markets, Insufficient Information…….• Weak Legal Framework, Contract Enforcement, Property Rights………• Institutional Capacity, Resource, Skills, Knowledge Constraints, Staff Turnover…….

Thank You