Linkages Between Competition Policy, Competitiveness & Economic Development

1. Linkages Between Competition Policy, Competitiveness & Economic Development By R. S. (Shyam) Khemani Principal, MiCRA, Washington DC, and Consultant-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, 2008 New Delhi

2. 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 concentration These factors tend to self re-enforce each other.

3. 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)

4. 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).

5. 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

6. 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.

7. Table 1 Number of Countries with Competition Laws (CL) by Regions

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.

10. High Low Low Intensity High Intensity 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

11. High Dominance Low Dominance High Effectiveness Low Effectiveness Figure 3Effectiveness of Competition (Antitrust) Law- Policy and the Extent of Market Dominance Source: Global Competitiveness Report 2006-2007

12. High Business Competitiveness Index Low IDA Non-IDA countries High Effectiveness Low Effectiveness Effectiveness of Competition (Antitrust) Law-Policy Figure 4 Business Competitiveness Index and Effectiveness of Competition (Antitrust) Law-Policy Source: Global Competitiveness Report 2006-2007

13. 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

14. 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’

15. 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…….

16. Thank You