The role of competition policy for development

Live Mint, April 08, 2018

By Pradeep S Mehta
A competition policy will help in improving the competitiveness of enterprises and act as a bridge between industrial and trade policies

Development promotes growth which is sustainable as well as inclusive. This entails “increasing the size of the cake” as well as ensuring that everyone is given a fair opportunity to contribute to the increase and also reap its benefits equitably. Unfortunately, most economies in the world have had, for some time now, “growth” as the prime policy goal, leaving essential aspects such as “equity” and “inclusiveness” largely to the “trickle down” phenomenon.

In general, this approach has resulted in better growth indicators, but led to increasing inequality, both in terms of opportunity and benefits. India is no exception, and while we celebrate the tag of world’s fastest-growing large economy, we have also become the country with the largest gap between growth of incomes for the top 1% and for the population as a whole.

Getting out of the mess will require active policy interventions so that development benefits are distributed among the larger public effectively.

Ensuring “equality of opportunity” would require creation of adequate income-generating opportunities for citizens. Some argue that this is possible through providing a temporary shield to domestic enterprises, enabling them to become competitive and face their predatory global rivals. Imposing import duties is one of the ways to shield domestic enterprises. The government as of now seems convinced of its utility, which may be due to vested interests. While it may result in increased prices for end consumers, this is a price worth paying for achieving “citizen welfare”. It has been pointed out that no country in the past has succeeded in “industrialization” by leaving enterprises to fend for themselves against foreign competition. Domestic enterprises have been nurtured in a planned manner.

Those not in support of this approach argue that times have changed and such protectionist measures will adversely have an impact on the interests of exporters and consumers in the long run. Protecting domestic enterprises from global competition prevents them from becoming globally competitive, improving productivity, and obstructs them from taking part in global value chains. Low-cost exporters from other countries take advantage and align their supply with global requirements. The growth of the Bangladeshi garments industry is a case in point. It has been pointed out that small and medium enterprises having greater access to international markets and linkages to digital economy are 4.5 times more likely to introduce new and innovative products.

Neither shielding domestic enterprises nor subjecting them to global competition can alone help in enhancing their competitiveness in absence of essential economic reforms. These include ensuring that domestic enterprises have access to land, labour, energy and capital at fair, timely, reasonable and equitable terms. We are increasingly realizing that existing regulations and policies hinder access to and use of such key resources. These unreasonable costs and burdens need to be identified and removed.

It takes political courage to correct such past mistakes. Efforts are required to identify sub-optimal policies, acknowledge them as mistakes and fix them through robust economic analysis and structured stakeholder consultation processes. Moreover, such reforms have limited marketing potential and are unlikely to catch the imagination of voters. Thus, policymakers prefer easy-to- adopt, though often contradictory, measures like rolling out a red carpet for foreign investors or imposing excessive import duties. Such second-order measures are unlikely to achieve the desired objective but may exacerbate the situation instead.

For instance, protecting domestic industries without aforementioned first-order economic reforms may result in inadequate capacity utilization, low productivity levels, poor quality and high costs. Similarly, opening up domestic enterprises to foreign competition sans domestic reforms may result in uneven playing field between foreign and domestic players. Such deep-pocketed international players can engage in anti-competitive practices to grab domestic market share.

Competition policy can play an important role in this regard. This was the consensus opinion at a recent international seminar on competition policy and development organized by CUTS International, which had eminent speakers such as Montek Singh Ahluwalia, D. K. Sikri, Fred Jenny and Allan Fels.

Competition policy can not only guide competition authorities in identifying and disincentivizing anti-competitive practices, but can also correct distortions to competition induced by other policies. Such distortions include, inter alia, high barriers to entry and operation of enterprises; unreasonable preference to public sector; prescriptions on procurement, supply and cost of land, labour, capital and other resources; and setting prices of final products and services.

An assessment of the impact of existing regulations on competitiveness of enterprises is essential and urgently required. Adoption of a comprehensive sector-neutral competition policy can be the first step in this regard. The government’s task is easier, as a draft policy is available on the website of the Union ministry of corporate affairs since November 2011. A competition policy will not only help in improving competitiveness of enterprises but can also act as a bridge between industrial and trade policies, by addressing inherent inconsistencies and promoting convergence in thought and action.

Pradeep S. Mehta is secretary general of CUTS International.

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