Competition Policy, Growth and Poverty
Reduction
CUTS’ 7Up4 Launch Conference
Competition Regimes in West Africa
19th June 2008, Accra
Roger Nellist and Tom Allan
Growth and Investment Group
Department for International Development, London
r-nellist@dfid.gov.uk
t-allan@dfid.gov.uk
Themes
• Reflections and Overview of linkages
• Competition links with Growth (inc
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Investment Climate)
Competition links with Poverty Reduction
Competition abuses in Africa and
elsewhere
Challenges
Competition Assessment Framework
Conclusions
Page 2
Reflections on Competition
• Competition is the process of rivalry between
firms striving to gain sales and make profits
• Major concept, but cannot be measured directly
• Competition is a process and not an ‘equilibrium
event’; it is not automatic; markets can fail
(forces at work against); needs to be promoted,
nurtured and protected
• Competition, vs. fair competition
• Culture of competition
Page 3
Overview of Linkages
CP -> Competition -> PSD -> Growth -> Poverty reduction
and/or
CP (via business behavioural changes) -> Poverty reduction
(consumer welfare)
[Efficiency and Equity]
Page 4
Competitive Markets Essential
for Growth – Basic Premises
• Fair and effective competition - and
competition policy - is fundamental to the
functioning of a modern market economy
• Efficient, fair markets essential to catalyse
private sector development and growth
• Competition drives innovation and
productivity improvements; these drive
economic growth
Page 5
Commission on Growth
Development
• Growth Report, launched May 2008: High level
Commission chaired by Professor Michael
Spence, a Nobel Laureate in Economics
• ‘Dynamic productivity gains from entry and exit
can overwhelm the static efficiency gains from
scale’
• ‘Structural change under competitive pressure is
what propels productivity growth’
• Policy recommendation: ‘Governments need to
increase competition and flexibility in product
and labour markets’
Page 6
Some Economics: Production
Function and Growth
 
• Cobb-Douglas: Y  AK L
• Endogenous growth theory: long run
economic growth depends on rate of
technical change
• Production Possibility Frontier moves out
with enhancements in innovation and
productivity
Page 7
Production Possibility Frontier
K
Output increases with innovation and
productivity enhancements, for any given
level of K, L inputs
PPF²
PPF¹
L
Page 8
More Competitive Pressure,
More Innovation - Evidence
• Firm-level surveys confirm the importance of competitive
pressure for incentives to innovative and increase
productivity
Source: WDR,
2005
Page 9
Competition – what it means in
practice
• Fair, effective competition creates level
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playing field for domestic SMEs (livelihoods,
firms and jobs, globalisation)
Free entry and exit - innovation, technology,
productivity
Intermediate inputs
Links with international competitiveness
More effective competition also limits
corruption
Page 10
Private Investment Has Grown
Faster in Countries with Better
Investment Climates
Source: WDR,
2005
Average 1984-2000
based on
International Country
Risk Guide’s index of
“Investment Profile”
Page 11
Links with Poverty Reduction
• Direct benefits - fair competition enhances
consumer welfare (prices, choice,
standards?); essential private goods and
services consumed by poor.
• Competition introduced in sanitation services
in Tanzania – lower charges and increased
access
• Competition introduced in generic drugs in
South Africa – prices for antiretroviral drugs
fell by up to 88% since 2003 and access
increased from 20,000 to 155,000
Page 12
Links with Poverty Reduction
• Indirect benefits through:
- general growth enhancements;
- access to sustainable livelihoods in formal
sector (shared growth, MMW4P);
• Publicly provided infrastructure and services (Govt
procurement arrangements, and bid rigging)
• Study of IDA countries: the world’s poorest
countries tend to have low levels of competition in
domestic markets and a high degree of market
dominance (FIAS, 2007)
Page 13
Competition abuses hurt
consumers
“People of the same trade seldom
meet together, even for merriment
or diversion, but the conversation
ends in a conspiracy against the
public, or in some contrivance to
raise prices”
Adam Smith, The Wealth of Nations, 1776
“The ‘really big’ distortions to
competition are in poor countries”
W. Lewis (2004) The Power of Productivity
Page 14
Competition Abuses in Africa
• A study of media reports in sub-Saharan
Africa identified allegations of 617 anticompetitive practices between 1995 and 2004,
in 41 business sectors and in 34 countries.
• Harm to consumers and businesses
• The food and beverage sector received the
most allegations (148) – high prices in this
sector have a direct impact on the welfare of
the poor, who spend a higher proportion of
their income on necessities like food.
[Evenett, Jenny, and Meir, 2006]
Page 15
Competition Abuses in
Africa – other examples
• Commission for Africa Report 2005
- Role of competition policy in investment climate
- Examples of low competition’s impact: transport costs
• Distortions include:
(1) Private sector misconduct e.g. insurance, alcoholic
beverages in Kenya, transport cartels
(2) Privatization can create private monopolies e.g. Uganda
(3) ‘Subsidies’ for SOEs e.g. Telecoms in Zambia
(4) Alleged vested interests e.g. competition law in Egypt
Page 16
Legislative Barriers often a Major
Impediment to Competition:
Many kinds, but entry barriers particularly serious
Starting
a Business
Africa
Number of
Procedures
11
8
8
Time in days
64
53
35
Cost
(% Nat. Inc.)
215
43
40
Minimum Capital
(% Nat. Inc.)
297
110
1
E.Asia
S.Asia
* Adapted from Broadman (2007), figures rounded
Page 17
Competition policy is important
everywhere
• ‘Strong competition policy is not
just a luxury to be enjoyed by
rich countries, but a real
necessity for those striving to
create democratic market
economies’, Joseph Stiglitz, Nobel
Prize Winner
Page 18
Challenges for developing
competition policy
• Difficulties in assessing the evidence:
relationships, data, and measurement
• Lack of community awareness of the effects
of limited competition
• Small/vulnerable DC markets
• Capacity constraints
Page 19
Challenges of implementation
• Lack of coordination between competition
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authorities and other government agencies
Potential conflict with other policy objectives
Persistence of natural monopolies and tension
with sector-specific regulators
Resistance from vested interests
Lower priority and lack of political will
Page 20
DFID’s Competition
Assessment Framework (2008)
• Flexible diagnostic tool for policy makers
• Holistic approach, reflecting multiple causes of limited
competition
• Sequential set of questions
• Annexes highlighting key competition issues in
particular sectors
Page 21
The CAF approach: a brief
summary
• Poses sets of questions grouped by theme
• Select sectors important to economy or consumers,
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where some indication of possible problems (e.g.
high concentration, high entry barriers)
Identify relevant markets and market structures
Do Government policies hinder competition? (all
levels of government, regulated sectors, trade and
industrial policy, unequal enforcement of laws)
Identify vested interests
Look for signs of anti-competitive conduct by firms
Page 22
CAF: Draw Conclusions
 Is competition in relevant markets weak?
• If so, what are the effects?
• Who profits?
• Who loses?
• What corrective action is possible?
(Depends on local laws and institutions.)
• What are the likely effects of corrective
action on the economy?
(e.g. on investment, productivity,
employment, exports?)
Page 23
Uses of the CAF
• Developed as side product of continuing
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DFID-WBG (FIAS) competition programme
in India with CCI
Africa Regional Workshops –
Tanzania (Jan08), Botswana (Feb 08)
India, Bangladesh (March 08)
Vietnam, ++ (2008)
ODI Competition Research Programme into
state of competition in Africa and Asia
(2008 – 2009)
Growth analytics and MMW4P
Page 24
Competition Assessment
Framework (2008)
• Downloadable at:
http://www.dfid.gov.uk/pubs/files/caf2008.pdf
Roger Nellist, Head
Tom Allan, Economist
Growth and Investment Group
Department for International Development
London
r-nellist@dfid.gov.uk
t-allan@dfid.gov.uk
Page 25
Conclusions
• Fair competition matters for:
- stimulating growth (innovation and productivity)
- entrepreneurs (SMEs) to enter/expand market
- wealth creation, poverty reduction
• It matters in Africa!!
• Successful CP needs:
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pro-market commitment from top
bottom-up advocacy, and culture of competition
appropriate policies, laws, institutions
technical capability, financial resources
operational independence
• Beware of vested interests, that block reforms
• Assess and address the real impediments to competition
Page 26