Competition Policy and Growth in Sub-Saharan Africa CUTS’ 7Up3 Conference on “Promoting a Healthy Competition Culture in Sub-Saharan Africa” Gaborone, 14 February 2008 Roger Nellist Growth and Investment Group Department for International Development, London

Page 2 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

Page 3 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 4 Overview of Linkages CP -> Competition -> PSD -> Growth -> Poverty reduction and/or CP (via business behavioural changes) -> Poverty reduction (consumer welfare) [Efficiency and Equity]

Page 5 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 6 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

Page 7 Production Possibility Frontier Output increases with innovation and productivity enhancements, for any given level of K, L inputs PPF¹ PPF² K 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 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 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

Page 11 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

Page 12 Private Investment Has Grown Faster in Countries with Better Investment Climates Source: WDR, 2005 Average based on International Country Risk Guide’s index of “Investment Profile”

Page 13 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

Page 14 Competition Links with Poverty Reduction Think of people (poor) as: Consumers Employed Entrepreneurs Recipients of government-funded services

Page 15 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)

Page 16 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 17 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]

Page 18 Competition Abuses in Africa – other examples Commission for Africa Report 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 19 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

Page 20 Legislative Barriers often a Major Impediment to Competition: Many kinds, but entry barriers particularly serious Starting a Business Africa E.Asia S.Asia Number of Procedures Time in days Cost (% Nat. Inc.) Minimum Capital (% Nat. Inc.) * Adapted from Broadman (2007), figures rounded

Page 21 But, how do we know? “Distortions to competition are not always obvious…. They have to be dug out in each market” W Lewis

Page 22 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

Page 23 Making Progress: Assessing the state of Competition Recognise the different sources and types of anti-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)

Page 24 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 25 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)

Page 26 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

Page 27 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