Does Competition Policy Promote Development?

By Francisco Beneke*

There are almost 80 developing countries that have enacted an antitrust statute.[1] In such economies, budget constraints force governments to prioritize the implementation of policies that have the greatest impact. Assigning resources to, for example, prevent and eradicate terrible widespread diseases may be more justified than improving the conditions of roads. The situation is no different for competition policy. The antitrust agency has to be staffed and equipped, which requires taxpayers’ money. Therefore, it is important to know if antitrust law contributes to the development of a country and if there are any adjustments to be made in order to enhance its positive effects.

The academic debate on whether competition policy promotes development is complicated. First, because development itself is a controverted concept and, thus, there are many approaches on how to measure it. In this post I will focus on GDP growth. Even if a high income per capita is a poor measure of development, it is still a valid (though it should by no means be the only) goal to increase the income levels of the population in general.

The second reason for the complexity of the debate is the distinction between competition and competition policy. Many theoretical and empirical studies make the case for a positive relationship between more competition and technological innovation, productivity, and economic growth. However, a different issue is the effect of the policy itself. In other words, is competition policy effective in procuring greater rivalry among firms and, therefore, spurring increases in productivity and innovation that cause sustained long-term growth?

The answer to this question is not a matter settled between academics. Exploring one aspect of competition policy in the US, the enforcement of the law over the period of 1947-2003, Young and Shugart II (2010) find that the activities of the DOJ (measured by the ratio of its expenditures on the Antitrust Division to GDP) are associated with negative impacts on the productivity of firms in the short run with no evidence of long run benefits that compensate the temporary loss of productivity. In other words, it appears that behavior adjustment to antitrust rules imposes additional production costs on firms.

One weakness of the study is, strangely, the timeframe that is analyzed. Usually a greater temporal scope of the data allows for estimations less sensible to short-term shocks. However, in this particular case, the study is measuring different things across time regarding competition policy. As it is known, antitrust enforcement in the US went through a deep overhaul in the late 70’s and all through the 1980’s. Therefore, it is hard to know from the study the effects that the current design has.

In another study, Dutz and Hayri do find a positive association between the perception of firms that competition policy works and economic growth (Dutz and Hayri (1999)). The measure is taken from the Executive Opinion Survey (EOS) administered by the World Economic Forum. It captures the perception of firms, excluding that of other key stakeholders, such as consumers. Therefore, it could be problematic to interpret it as a measure of the overall quality of competition policy.

Another problem of using this and other perception measures of the effectiveness of competition policy is that this latter concept is in itself ambiguous. The EOS does have methods to ensure consistency of the answers within a country, but a more difficult task is to ensure that the mindset with which executives evaluate competition policy across countries is comparable.

A few examples can illustrate the problem mentioned in the paragraph above. In the 2015 release of the EOS’s results we have that in Latin America the county where firms perceive that competition policy works the best is El Salvador, with a slightly better score than Chile. Although El Salvador has made a lot of progress in the implementation of competition policy, Chile has a significantly better track record in actively pursuing cartels and abuses of dominance. It is also surprising to see that Mexico falls well behind and even ranks worse than Guatemala, a country with no competition law. While no measure is perfect, the one used in Dutz and Hayri (1999) is far from adequate to measure real differences in the effectiveness of competition policy across countries.

Other studies use a composite index based on both perception and objective data on competition policy such as the formal and factual independence of antitrust agencies and the years of existence of a competition statute (Voigt (2006) and Bolaky (2013)). For a review of the literature that analyzes the effects of competition policy and growth see Petrecola, et al. (2015). These studies deserve some comments. In order to keep this post short, their analysis will be the object of a future entry.

The studies that find an association between more competition and strong economic performance present their own challenges. Petrecola, et. al. (2015) is an interesting case in which the authors find a positive association between the perception of the intensity of competition within a country and growth at the global level, but find a statistically significant negative association when considering only Latin American countries.

It is a hard task to reconcile these findings. The authors offer some potential explanations such as the accurateness of the indicators used, the preference of macroeconomic policy over competition policy (which both reduces the relative effects of competition policy on growth and the priority that governments give to the former). What is curious is that the indicator used in this study captures the perception of the intensity of local competition and not the effectiveness of competition policy so the explanations address why competition itself has a negative impact on growth. In addition, the reasons put forward argue for a reduced effect of competition policy but do not explain the “wrong” sign of this variable in the regression results.

Another aspect of competition policy is its advocacy pillar. The relationship between certain reforms usually advocated by antitrust authorities and growth has been vastly explored. Openness to trade was found to have a positive significant association with investment rates in Levine and Renelt (1992) and Brunetti and Weder (1995). Bailey, Graham and Kaplan (1985) find that the deregulation of the airlines industry in the 70’s explains most of its growth in productivity. However, it is worth pointing out that an important issue would be to measure the effectiveness of the advocacy efforts of the authority in ensuring reforms that promote growth.

Competition authorities rely on the studies that show its net positive effects on economic performance to claim a central role in the formulation of public policy and to receive more resources to expand the scope of their enforcement and advocacy activities. And to be fair, there is no shortage of such studies. However, this is only part of the story. Competition policy conceived as an instrument to enhance consumer welfare is not conclusively proven to promote growth and, least of all, development.

Possibly as a result of this, there is an emerging literature that addresses the issue of whether a different competition policy can be designed that fits the needs and priorities of developing countries. Some prominent scholars on the issue include Eleanor M. Fox and Michal S. Gal. Both scholars are co-authors of an influential paper on the subject, where they explore some of the specific economic and social characteristics of developing countries that warrant an adjustment of antitrust law and policy (Gal and Fox (2014)). Some actual examples of adapting competition policies to meet development goals are China and South Africa.

To conclude, I would like to stress that the positive net effects of competition policy on economic growth are not conventional wisdom. It is still an open question and invites academics and practitioners to contribute to the clarification of such an important matter.

* Co-editor, Developing World Antitrust

@Paco_Beneke

[1] The International Competition Network has member authorities from 115 different economies. This number is not exhaustive of all countries that have a competition law because, for example, the Chinese antitrust agencies are not members of the network. However it is still a good approximation. The number of the advanced economies from the International Monetary Fund is 40. This latter number includes two economies without an antitrust statute: San Marino (a country of approximately 31,000 inhabitants) and Macao (a special administrative region in China). This leaves us with some 77-plus developing countries that have an antitrust statute.

References

Bailey, Elizabeth E.; Graham, David R.; and Kaplan, Daniel P. Deregulating the Airlines. Cambridge, Massachusetts. MIT Press (1985).

Bolaky, Baineswaree. “The Effectiveness of Competition Law in Promoting Economic Development.” International Journal of Economics and Finance Studies, Vol. 5, No. 1, (2013).

Brunetti, Aymo, and Weder Beatrice. “Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures.” Weltwirtschaftliches Archiv 134.3 (1998): 513-33.

Dutz, Mark and Hayri, Aydin. “Does More Intense Competition Lead to Higher Growth?” CEPR Discussion Paper 2249, C.E.P.R. Discussion Papers (1999).

Gal, Michal S. and Fox, Eleanor M., “Drafting competition law for developing jurisdictions: learning from experience”. New York University Law and Economics Working Papers. Paper 374 (2014).

Levine, Ross and David Renelt. “A Sensitivity Analysis of Cross-Country Growth Regressions.” American Economic Review Vol. 82, No. 4, pp. 942-63 (1992).

Petrecolla, Diego; Greco, Esteban; Romero, Carlos; and Vila-Martinez, Juan P. “Economic Structure and Competition Policy Application in Latin American Countries.” In The Economic Characteristics of Developing Jusrisdictions: Their Implications for Competition Law. Gal, Michal S. et al, Eds. Edward Elgar Publishing, Northampton, Massachusetts (2015).

Voigt, Stefan “The Economic Effects of Competition Policy: Cross-Country Evidence Using Four New Indicators.” Available at SSRN: http://ssrn.com/abstract=925794 (2006).

Young, Andrew and Shughart, William. “The consequences of the US DOJ’s antitrust activities: A macroeconomic perspective,” Public Choice, Springer, vol. 142(3), pp. 409-422, March (2010).

 

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