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The Competition Factor

BRUSSELS/MEXICO CITY – Since the global economic downturn began in 2008, debate has centered on the macroeconomic strategies and instruments used to address the crisis and foster recovery. But correcting imbalances and addressing short-term slowdowns or recessions, while important, should not be allowed to overshadow the need to establish long-term conditions for solid and sustainable economic growth.

So far, macroeconomic policy has borne both the blame for economic malaise and the hope that it can be overcome. But we should be devoting as much attention to the microeconomic problems – such as poor incentives, market failures, and regulatory shortcomings – that led us into the crisis in the first place.

Indeed, just as microeconomic problems in the financial sector triggered a credit crunch and fueled a global recession, so microeconomic factors hold the key to recovery. Many economies need to fix the financial sector and restore credit, while many more need to raise productivity in order to boost growth and create jobs.

Some industries suffer from counterproductive and ill-conceived regulation; others are ailing as a result of monopolistic behavior by dominant firms, or because they face a lack of effective competition and transparency in utilities and financial services. Fixing these problems would help us to return to a path of growth and prosperity for all.

To achieve this, we first must follow the Hippocratic oath and avoid doing more harm. Governments around the world should ignore the temptation to relax competition in order to provide relief to particular industries or economic groups.

The renowned American economist Mancur Olson argued that stagnation in developed economies results from cartels and lobbies becoming more numerous and powerful over time, until they eventually drain a country’s economic dynamism. Preserving a competitive environment in which markets remain open and contestable is the best tonic, because firms must constantly innovate and perform better under such conditions. This, in turn, makes our societies more creative and, ultimately, more prosperous.

Efforts to relax competition have many faces. But all of them make an economy less productive and redistribute wealth to small, coordinated groups with vested interests and a strong inclination to lobby the government.

The most common approach is protectionism, which has been part of the political discourse in various countries in recent years. But official measures to help national producers at the expense of domestic business customers and consumers are always short-sighted, for they fail to help producers to address the challenges that they will have to face sooner or later anyway.

Similarly, old-fashioned dirigisme – such as attempts to “pick winners,” foster national “champions,” or keep failed business models alive through state subsidies – is both harmful and doomed to fail. And misplaced regulation – for example, in the service sector – remains a barrier to healthy competition in many countries.

Once we have stopped doing harm, we must start doing the right things. Economic policy is like gardening: pulling on plants will not make them grow faster, but a successful gardener can provide them with the right environment in which to flourish.

Relying on competition can help societies to unleash well-functioning markets’ power to provide goods and services. To achieve this, policymakers must have a sound enforcement framework at their disposal, take an economy-wide approach, and attract the participation of all stakeholders.

Sound enforcement implies legal tools and resources to pursue and implement an economic policy, along with an institutional design that reduces meddling by vested interests. Consider, for example, the importance of impartial and effective antitrust authorities, or subsidy schemes that are sufficiently well designed to ensure that they truly serve the public interest.

An economy-wide approach is needed because markets are interconnected. Misguided regulation or market failures that harm competition anywhere can burden the entire economy. The global crisis erupted because major problems in the functioning of the banking sector had been left unaddressed. The poor functioning of input markets, such as markets for energy or intermediary products, can also do a lot of economic harm, not least because it hampers external competitiveness.

Finally, strengthening competition throughout the economy requires broad support. This cannot be achieved without bridging ideological divisions and overcoming political pressures from particular economic groups. Advocacy can play a key role, by educating not only policymakers, but also citizens and businessmen, about the benefits of competition. There should be a wide consensus that a pro-competitive environment is one of the keys to economic prosperity.

Australia provides a good example of how pro-competitive policies deliver results. Its economy was one of the OECD’s worst in terms of productivity growth in the 1980’s; a decade later, Australia was in third place. In the interim, all of the country’s economic regulation was examined from the standpoint of maximizing competition, and a national pro-reform consensus was forged.

Currently, significant efforts are underway in several countries, including Mexico. Structural reforms to boost productivity will also be crucial to ensure Europe’s economic recovery and the survival of its social model. The “Single Market Acts I & II” provide a comprehensive agenda to tap fully the potential of an integrated and competitive market of 500 million consumers to catalyze growth and prosperity in the European Union.

We know from experience that competition works. By basing economic policy on this experience, we could not only avert Olson’s grim prophecy. We could also accelerate economic recovery, increase the pace of innovation, and raise livelihoods for millions of people worldwide.