Contribution of Competition to Growth

1. Contribution of Competition to Growth Peter D’Souza Growth Team Department for International Development 1 Palace Street, London SW1E 5HE Abercrombie House, Eaglesham Road, East Kilbride, Glasgow G75 8EA

2. Competition – what it means in practice • Fair, effective competition creates level playing field for domestic firms • Free entry and exit • Access to inputs and markets • Cartels raise prices and limit choice • Links with international competitiveness • More effective competition also limits corruption

3. 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, technology and productivity improvements; these drive economic growth

4. 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

5. Production Possibility FrontierPotential output increases with innovation and productivity enhancements, for any given level of K, L inputs K PPF² PPF¹ L

6. 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

7. Competition and the Downturn • Competition principles challenged as politicians try to avoid bankruptcies and protect jobs • Lack of integration into globalised economy might have helped escape certain effects of recession, but not a reason to avoid future integration. • Special features of the banking sector may justify government intervention. • Restrictive practices typically worsen in recessions • Multinational companies prioritise production and jobs in home market, whilst developing countries often face cuts. • In a recession Competition Authorities should focus activity on advocacy and market studies, rather than pushing for new reforms.

8. UK Supports Fair Market Competition “We will help governments that, like us, want to promote open and fair markets in which enterprises have access to resources and skills, without being disadvantaged by the power of vested interests or corruption.” “We will work to improve the business environment for investment and growth… through an African-led Competition Forum the will help governments identify obstacles to fair competition.” DFID White Paper, July 2009 1 Palace Street, London SW1E 5HE Abercrombie House, Eaglesham Road, East Kilbride, Glasgow G75 8EA

9. 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

10. 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)