The bigger picture and meaningful policy goals

Income per capita varies wildly across countries. Adjusted for purchasing power, the average resident in Luxemburg has an annual gross income of over USD 100 thousand while the average Bangladeshi makes do with USD 3.5 thousand. Let that sink in for a second. Where you were born determines, to a great extent, your experience on this planet.

This phenomenon has captured a great deal of attention from economists for close to a century. From what we have been able to observe since the Industrial Revolution, there are times at which some poor countries have been able to grow fast for a long period of time and catch up with the income levels of the developed world. Many economists have tried to identify what was Japan’s, South Corea’s or Singapore’s secret. Parallels have been drawn to how the US or Western Europe experienced growth at an earlier stage. One point of focus has been the policies that were responsible for the successes observed. Investments in education have been a common pattern as well as a well-articulated industrial policy. Countries like the US, and later Japan and South Corea, changed their competitive advantage. They protected their industries at first so that they could develop and reach the technological progress of their international rivals.

The same path was tried around the world with a mixed bag of results. The import substitution industrialization model (in other words, favoring domestic production over foreign imports) failed tremendously in Latin America. Many poor countries were never able to leave behind meager investment rates to create the wealth and mimic the knowledge of the production means of other countries.

Efforts to identify the determinants of this situation have been numerous. There are many empirical studies that attempt to identify the main causes of growth. The results surprise very few people. A mix of political and macroeconomic stability, strong institutions, higher levels of education, and so on have been identified to have a strong causal link with higher per capita incomes. In principle, then, we do know why some countries are poor and some are rich. Those that wisely prioritize the use of public funds to take care of their uneducated and vulnerable citizens and create stable and sustainable forms of government can escape the trap.

The Economist, however, has recently claimed that “[e]conomists understand little about the causes of growth”. The assertion is to a great extent on point. Even if economists know that differences in growth and prosperity are due to differences in technological progress and the factors that determine this (such as low levels of education and higher country risk), they have not come up with a satisfactory answer regarding as to why certain developing countries have been able to overcome these problems and others have not.

Economists are frequently criticized for how they approach these questions. The classic accusation is that they over-rely on mathematical and statistical tools. On the other hand, at a general level, abstractions do allow observers to obtain a manageable framework to analyze a set of facts. Indeed, some degree of abstraction is not only helpful but imposed by the complexity of the phenomena studied by economics. However, equations and mathematical theorems, as helpful as they are, should be complemented with other economic approaches such as historical studies.

I mentioned Bangladesh at the beginning of the post because it is a perfect example of the shortcomings of our current understanding of economic growth. As pointed out by many experts, Bangladesh appears to be solving its problems and is poised to surpass Pakistan in terms of GDP per capita very soon, but no one could have predicted that before the country entered into this path. In other words, any economist’s prediction on which will be the next poor country to start growing fast and in a sustainable manner can be regarded as an educated guess, at best.

Since this blog is focused on antitrust law, I am obliged to explain why this paragraph is the first place where I mention the term. It is a way of making an important point. Competition policy does not exist in a vacuum. What we make of it should be dictated by a meaningful context. We have to understand the big picture before we can decide what to do with antitrust law enforcement. Competition law is sometimes said to be the economic constitution of a country or economic region. However, since most competition laws are applied with a specific purpose—improving consumer welfare—such an assertion is completely off the mark. My point is that, although we increasingly understand more about how the economy works, there is still a big shadow over many (economic, social, political, psychological) relationships that we have yet to discover. The role of competition policy within different socio-economic contexts does not escape this reality.

To wrap it up, as we improve our measures of competition policy performance, we will be more able to test their effects on economic performance. There will also be natural experiments that will help us to estimate how deviations from the consumer welfare criterion affect law enforcement and other economic policy objectives. However, none of this will be meaningful until we gain more knowledge on what moves the poorer parts of the world to a path of sustained economic growth. Little by little, we will understand the role competition policy has to play in a wider economic context. Some of the questions that I hope we will be able to answer are the following: if economic growth is about getting the political economy right, is there a relationship between the latter and antitrust law? Can we develop manageable legal standards to create a consistent case law if we depart from consumer welfare considerations? If development into an innovation-oriented economy requires at a first stage protectionist policies, what room does that leave for competition policy? What role does market concentration play in income inequality?

These are challenging topics. However, to paraphrase what  Christopher Edley, Jr. said at my LLM graduation (or what I think I understood): although we need to have the confidence to know that we can tackle any complex task that is before us, we need to be humble enough to recognize that to reach the answer we always need to go deeper.


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