Roger Nellist Growth and Investment Group Department for International Development, London

Competition Policy and Growthin Sub-Saharan Africa

CUTS’ 7Up3 Conference on“Promoting a Healthy Competition Culture in

Sub-Saharan Africa”

Gaborone, 14 February 2008

Roger NellistGrowth and Investment GroupDepartment for International Development, London

Themes

• Reflections and Overview of linkages• Competition links with Growth (inc

Investment Climate)• Competition links with Poverty Reduction• Competition abuses in Africa and

elsewhere• Evidential challenges• Competition Assessment Framework• Challenges and Conclusions

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

Overview of Linkages

CP -> Competition -> PSD -> Growth -> Poverty reduction

and/or

CP (via business behavioural changes) -> Poverty reduction (consumer welfare)

[Efficiency and Equity]

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

Some Economics: Production Function and Growth

• Cobb-Douglas:

• Endogenous growth theory: long run economic growth depends on rate of technical progress

• Production Possibility Frontier moves out with enhancements in innovation and productivity

LAKY

Production Possibility Frontier

Output increases with innovation and productivity enhancements, for any given

level of K, L inputs

PPF¹

PPF²

K

L

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

Competition – what it means in practice

• Fair, effective competition creates level 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

Competition Policy and Investment Climate

• A consistent competition policy framework boosts investor confidence

• CP is part of good business regulatory regime

NB: Competition Policy is complementary to privatisation and de-regulation reforms

Regulation and Growth

“Countries which improve their regulation to the best international standards can increase growth by as much as 2.3% a year”.

UK 2006 White Paper “Eliminating World poverty: making governance work for the poor” - based on World Bank (March 2006, Djankov, McLeish, Ramlho)

“If each Indian state could attain the best practice in India in terms of regulation and infrastructure, the economy should grow about two percentage points faster.”

Investment Climate Assessment (ICA) of India, World Bank, 2002

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”

Roots of Growth and Poverty Reduction to be Found in Improving Investment Climate

WDR2005: Investment climate reforms in, for example China, India, and Uganda, have been associated with: Dramatic increase in private investment/GDP Dramatic fall in poverty

Competition Links with Poverty Reduction

Think of people (poor) as:

• Consumers

• Employed

• Entrepreneurs

• Recipients of government-funded services

Links with Poverty Reduction

• Direct benefits - fair competition enhances consumer welfare (prices, choice, standards?); essential private goods and services consumed by poor.

• 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)

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

Competition Abuses in Africa

• A study of media reports in sub-Saharan Africa identified allegations of 617 anti-competitive 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]

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

Competition Abuses – other international examples

• Cartels: basic commodities - Bangladesh (e.g. rice, sugar, potatoes); drinking water - Lao PDR; brick making –Nepal

• Predatory pricing of beverages - Vietnam• Bid-rigging: e.g. school construction- China; water

pipes- Nepal; road construction and bridge building-Japan; infrastructure construction- Vietnam

• Transport cartels – e.g. Bangladesh, Nepal and India

• International cartels e.g. vitamins• Mergers reducing cement producer competition –

India

Legislative Barriers often a Major Impediment to Competition:

Many kinds, but entry barriers particularly serious

Starting a Business Africa E.Asia S.Asia

Number ofProcedures 11 8 8

Time in days 64 53 35

Cost (% Nat. Inc.) 215 43 40

Minimum Capital(% Nat. Inc.) 297 110 1

* Adapted from Broadman (2007), figures rounded

But, how do we know?

“Distortions to competition are not always obvious…. They have to be dug out in each market”

W Lewis

Evidential challenges: CP, Growth and Poverty Reduction

• Assembling the evidence:

- What relationships are we examining?- Theoretical, anecdotal, empirical?

• Research challenges:

- attribution (CP reforms often part of a package)- paucity of data for DCs- timing of benefits

Making Progress: Assessing the state of Competition

Recognise the different sources and types ofanti-competitive practise:

• Public sector as well as private sector impediments to competition;

• Fundamental political/economy as well as technical, legal and economic impediments - vested interests (institutional, commercial, individuals)

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

Uses of the CAF

• Developed as side product of continuing 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)

Challenges in implementing Competition Policy

• CP is at a ‘crossroads’• Conflict with other policy objectives? • Persistence of natural monopolies and tension

with sector-specific regulators• Resistance from vested interests• Too technical and of lower priority?• Lack of political will and independence• Small (vulnerable?) DC markets• Capacity constraints

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: - 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

Roger Nellist Growth and Investment Group Department for International Development, London

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