Bespoke Competition Policy for Developing Countries

Background

Market competition is an important determinant of economic development. However, the exact mechanism through which competition and hence competition policy affects growth and sustainable development is unclear, especially for developing countries. Having been developed largely with reference to the economic environments of developed countries, competition theory and policy do not necessarily fit developing economies. Factors such as the availability of capital markets, quality of infrastructure, predominance of specific sectors and income levels all influence competition dynamics. They differ strongly not only between developed and developing countries, but also within the latter group.

Empirical studies, usually involving some index measure of competition policy, indeed do not conclusively show the benefits of competition law enforcement on growth and development in developing countries. We believe this may in part be the result of too little differentiation in these studies. There is not much variation in the written competition law texts across countries, yet the countries themselves are vastly divergent. This project aims to explore whether there is a need for a framework for developing countries to tailor their competition laws and policies to the specifics of their stage of development.

From the point of view of economic theory, it is unclear what level of competition intensity is optimal in different economies. Even though more competition should reduce price levels its dynamic effects are much more uncertain. Quite likely, the peak of Aghion's inverted U-shaped curve that reflects the trade-off between the Arrow-effect that more competitive markets spur innovation and productivity, versus the Schumpeterian effect that some market power generates the necessary resources for R&D does not lie at the same level of competition across countries as they develop.

Even though developed economies typically favor more competition, some evidence in developing countries, presented by Alvarez and Campusano (2014), shows negative effects on innovation across sectors. In order to design effective policy we must first revisit economic theory of competition to identify the likely effects it will have under the market conditions of different developing countries. Furthermore, differences in institutions and cultures create obstacles in the enforcement of laws, which should be taken into account when deciding what kind of policy and tools are best suited in achieving market competition objectives. A goal of this research project is to distinguish a variety of separate factors that determine optimal competition policy in a developing economy, taking into account the market characteristics in a particular stage of development, capabilities of institutions and the developmental goals that competition policy should and is able to serve.

This study aims to contribute to the work towards the proliferation of effective competition policy in several ways. Firstly, it will expand our understanding of the relationship between competition theory and policy through both theoretical analysis and empirical research. Secondly, it will create a framework for government bodies to study and develop competition policy in the context of their specific economic environments. Thirdly, we believe that a framework based on economic analysis an objective empirical research will serve as motivation for governments to develop and evaluate their competition policies.

 

Objectives

We identify five research objectives:

  1. To gain a better understanding of the potential effects of market competition on development.
  2. To develop a methodology to determine optimal intensity of competition in an economy.
  3. To study implementable laws and policy tools required to achieve market competition goals.
  4. To perform empirical test on the predictions of the methodology developed.
  5. To create policy recommendations on the basis of the results and conclusions of this research.

 

Research Plan

The research process is separated into four phases:

Phase 1: Theoretical research
Phase 2: Data Collection
  1. From a selection of databases
  2. By conducting surveys of competition authorities in developing countries
Phase 3: Empirical Research
Phase 4: Conclusions and Policy Recommendations

 

Contact Information

Dovile Venskutonyte
E-mail: dovile.venskutonyte@student.uva.nl

Prof. Dr. Maarten Pieter Schinkel
E-mail: M.P.Schinkel@uva.nl

Yves Kenfack
E-mail: Yves.kenfack@unctad.org

Ebru Gokce
E-mail: Ebru.Gokce@unctad.org

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