Sunday, November 23, 2014

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.

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    1. CommentedJoseph Blower

      "To achieve this, we first must follow the Hippocratic oath and avoid doing more harm."
      I disagree. Economists typically don't believe in free lunches. For almost any decision there are both costs ("harms") and benefits.
      Rather, we should maximize benefits (all things considered), relative to harms. That is, we should think like utilitarians (google "utilitarianism").

    2. Commentedudi cohen

      Competition- yes Growth- no. the pursue after consistent growth encourage efficiency or in other words reducing work power or unemployment especially in times of recession. and encourage innovation - which usually is good and ,no doubt, inevitable as blessed - which in the broad spectrum lead us, again, to less work force and in a world that most of the population is compose of 'low tech' work force we get back to unemployment and unemployment result disorder and instabilty. there for, we need to incentive competition ,but not Growth, domestically by constraining the monopolistic powers and dominate firms. that should be done until a solution will be found to 'how to comprehend this technological era world wide'.
      in addition, Growth was also the main cause- after greed - to the numerous leveraging that was possible thank to the stock market and is greed companion.

    3. CommentedZsolt Hermann

      I fully agree with this statement:
      "...To achieve this, we first must follow the Hippocratic oath and avoid doing more harm..."
      For any healing, any solution this is the first step we need to achieve, there is another expression, "when you do not know where to go forward it is better to sit and do nothing...".
      But this is only the start.
      For any solution, healing then one needs a foundation, the precise diagnosis of what has caused the problem, if we continue in the wrong framework, going off the right path, even our best intention will only yield further worsening, crisis.
      And unfortunately from here on the article sets up the same misdiagnosis many other similar articles, and most of today's leaders, economic experts make.
      We cannot expect further growth the way we are hoping.
      Constant quantitative growth is a dream, it is impossible in a closed, finite natural system.
      It has no natural foundation, it goes against all of nature's laws.
      Every living, integral system is based on balance and homeostasis. Ruthless competition, constant self-calculations leads to destruction in such systems, like cancer in the body.
      Europe is a prime example for this, although there is recognition of the need of unity, cooperation, they wanted to achieve this in a partial way, selfish, greedy, set up common currency, common market and now common financial regulations to increase profit, while leaving everything else separate, still keeping competition in between the states in the union.
      Now we can see how it "works", sliding into inevitable collapse.
      Humanity is a single, globally interconnected and interdependent system, whether we want it or not.
      This is not human made, we evolved into such a state, we have no free choice about it, we cannot decide to disconnect or withdraw. We are regulated by natural laws that are "above us".
      Self benefiting competition, exploitation of others for the sake of the self has to give way to mutually responsible cooperation, to form a mutually complementing human network, which is working for the benefit of the whole.
      In a global, integral system the individual or even a nation can only succeed, prosper, when the whole system is healthy and functions optimally.