CREW Discussion Paper

1. CREW PAC Meeting CREW Discussion Paper Pooja Pokhrel Nathan India (Pvt.) Ltd. 14 March 2013, Jaipur

2. Purpose of Paper • Literature review to survey methodologies used to assess impact of competition reform • Recommend a methodology for CREW • Develop a rationale for selecting 4 countries and 2 common sectors for CREW • Recommend 4 countries and 2 sectors

3. Presentation Overview • Part I: Literature Review • Commonly Used Methodologies • Pros/Cons of each • Suggested methodology for CREW • Part II: Country/Sector Selection • Country Selection Approach • Recommendations for CREW countries • Sector Selection Approach • Recommendations for CREW sectors

4. Part I: Survey of Methodologies

5. Commonly Used Methodologies • Time Series Variation • Comparing outcomes before and after reform • Spatial Variation • Comparing outcomes between regulated and unregulated markets • Structural estimation/Simulation model • Shocking an economic model with reform variables to investigate the effect on other structural variables • Cost Benefit Analysis • Comparing monetized costs and benefits of reform • Surveys • Targeting agents and beneficiaries specific to the particular case, industry or market under investigation

6. Time Series Variation

7. Time Series Variation (Contd.) • Pros: • Simple to use and expedient. • Works with aggregate or micro-level data. • Richer dataset can allow us to control for external shocks • Cons: • No counterfactual • If used too simplistically and without econometric rigor, can introduce estimation errors. • Choosing data time periods is crucial. If post-reform data is too close, transitional issues. If too far away, difficult to establish changes in outcomes to reform and not other external sources. • If nature of reform is drawn out, then defining a reform period becomes problematic.

8. Spatial Variation • Pros: • Allows researches to simulate a counterfactual • Hence, more precise estimates than time-series • Cons: • Data intensive • Often difficult to find two sample sets that are characteristically similar • Does not give a broader view of what may have happened over time

9. Combining Spatial & Time

10. Structural estimation/Simulation model • Pros: • Builds on a strong background in modern economic theory • Effects of reform can be explained by interactions of several economic variables • Accuracy of the underlying model can be tested through calibration with real market data

11. Structural estimation/Simulation model (Contd.) • Cons: • Often referred to as “black boxes” because of intricacies of inherent economic equations • High cost of entry for new modelers • Data demands not insignificant

12. Cost Benefit Analysis • Pros: • Provides a quick view of whether proposed reform options are worth it • Does not require much econometric or modeling experience • Cons: • Monetizing indirect and intangible benefits or costs often difficult to do • Aggregating individual wellbeing to estimate social wellbeing is often critiqued • Overstating either benefits or costs can severely misrepresent the outcome.

13. Surveys • Pros: • Useful if no data exists • Can be used to assess perceived impact • Provides a broader supplement to methods described above • Cons: • Expensive to conduct, esp. if using field surveys • Not a rigorous method on its own to measure impact

14. What does this mean for CREW? • “Methodologies have methodological flaws” • Data will always be a problem • A fixed rigid approach will not work, esp. when dealing with multiple countries & multiple sectors • Methodologies will need to be tailored, yet be consistent across the board

15. Suggested Methodology

16. Part II: Country/Sector Selection

17. CREW Country Selection Conditions • 2 countries from Africa and 2 from Asia • At least one SADC country • At least one ASEAN member state • At least two DFID priority countries • History of CUTS engagement in each country • Only Anglophone countries in Africa

18. Empirical Evidence • Very few studies deal with what contributes to the highest impact of reform • Kronthaler (2010) studies what contributes to effectiveness of competition reform • Level of economic development, Control of Corruption, and the time a competition law exists matter

19. Data seems to confirm…

20. Data seems to confirm… (Contd.)

21. Country Selection Approach • Start with 99 countries in Asia and Africa • Employ a 3-step screen: • Step 1: Income considerations • Step 2: Considerations of effectiveness in existing policies • Step 3: CREW implementation considerations

22. Step 1: Income Considerations • Focus on developing countries (only LI & LMI) • Immediately eliminates 32 countries, including Brunei and Singapore in ASEAN • Screen out countries with per capita income of less than $600 • Proxy for level of economic development • 44 countries remaining

23. Step 2: Effectiveness of Policies • Avg. WEF index “Effectiveness of anti-monopoly policies” for past 2 years<= 3.5 • Variable of interest • 33 countries remaining • Avg. WGI “Regulatory Quality Index” for past 5 years<= -1.0 • Competition policy embedded with regulatory environment • 19 countries remaining • Avg. WGI “Control of Corruption Index” for past 5 years <= -1.0 • Consistent with Kronthaler & data correlation • 16 countries remaining

24. Step 3: Implementation Considerations • Countries with CUTS experience • Only Anglophonic countries • Arrive at a list shortlist of 8 countries, of which 2 (Nigeria & Ghana) do not have a competition law in place • Final shortlist of 7 countries • Africa: Ghana, Zambia • Asia: India, Indonesia, Philippines, Sri Lanka, Vietnam

25. Sector Selection Approach • Based on sector characteristics • Existence of sector policies and other signs of sectoral reform • Nature of market • Impact on the poor • Data Availability • Assign scores to make objective cross-country comparisons

26. Sector policies & reform • Score ranging from 0 to 4. • 0: No sector regulation or policy • 1: Sector policy but no sector regulation • 2: Sector policy and/or sector regulatory law • 3: Also a sector regulator • 4: Additional signs of reform.

27. Nature of Market • Review number of market players, market shares, influence of SOEs • Score ranges from 1 to 3 • 1: Primarily a monopoly or if there are no organized market players • 2: Has one or a few large players with some other smaller participants • 3: Seems to have multiple market players and competition.

28. Data Availability • Reviewed based on proposed CREW methodology • Assign score ranging from 1 to 3 • 1: Aggregate-level data available • 2: Micro-level household and/or firm data available • 3: Relevant data, particularly at the micro-level available, both before and after reform.

29. Impact on the poor • Review focused on current reach of the sector to the poor, proportion of the poor’s expenditure on sector • Assign score between 1 and 2 • 1: Relatively less impact • 2: Relatively high impact

30. Sector Selection • Reviewed 6 sectors • Domestic Fuel • Electricity • Passenger Transport • Pharmaceuticals • Staple Food • Telecommunications • For 7 shortlisted countries • Only sectors, not product markets

31. Country/Sector Scorecard

32. Proposed Countries & Sectors • Sectors • Pharmaceuticals, Telecommunications, Passenger Transport (in that order) • Countries • Ghana, India, Indonesia, and Zambia

33. Thank you!