Business Weekly interviewed Patrick Imam, IMF Resident Representative based in Harare, on the importance of competition for growth in sub-Saharan Africa.
Question: The IMF just came out with a study analysing the importance of competition for growth. Can you please summarise the key message?
Answer: Yes of course. The IMF just published the Regional Economic Outlook and analysed how the level of competition among firms impacts growth. This is a topic that has been studied in recent years in advanced economies, with clear evidence that competition is diminishing, but little work has been undertaken on sub-Saharan Africa so far.
Our research indicates that product market competition in sub-Saharan Africa is generally low, relative to the rest of the world. The country-level data shows that more than 70 percent of countries in the region are below the world median in terms of competition indicators. This reflects the market dominance of large firms, the absence or weak enforcement of competition policies, and structural or regulatory entry barriers for instance.
The analysis of firm-level data shows that firm mark-ups, which are an indicator of corporate market power as they reflect the wedge between prices and costs, are higher in sub-Saharan African countries than in other emerging market economies and developing countries, especially in the services sectors. And as in other parts of the world, the evidence is clear that mark-ups have been increasing in recent years, whether in Senegal or South Africa for example, suggesting that more and more sectors are seeing declines in competition. And this decline in competition is costly for society.
The empirical analysis suggests that an increase in competition to the top quartile of the global distribution can increase the annual rate of growth of real per capita GDP by 1 percentage point. This is economically significant over time. Such an increase is likely to be driven by an improvement in productivity growth and export competitiveness.
Lack of competition also has effects on welfare. Our analysis shows that price levels for most goods and services, including food, clothing, and health services are significantly higher, by about 20 percent, in sub-Saharan African than those in other emerging market economies and developing countries. Increasing competition can help to significantly lower prices in the region therefore.
The findings that lack of competition hurts the economy are also supported by firm-level evidence, which shows that market structure affects firms’ behaviour and performance, ultimately shaping macro-economic performance. As an example, we find that a decline in firm mark-ups is associated with an increase in firm investment, exports, productivity growth, and the labour’s share in output.
Therefore, to enhance economic competition in the region and to realise its full benefits, Africa needs to follow a holistic approach. And this approach should encompass a well-defined and executed competition policy framework but also include complementary trade and investment liberalisation, and reforms to foster productive private sector activities.
Q: Would opening African economies to foreign competition not have a negative impact on local businesses who may not have the capital or expertise to compete?
A: It is often argued that increased competition, especially from foreign entrants, may hurt the domestic industry and create dominant foreign firms that end up stifling competition and harming consumer welfare. This “infant industry” argument says that local companies need to be nurtured, through sheltering them temporarily from foreign companies, otherwise they will collapse. There is some merit to these arguments, even though these concerns generally lead to trade and other regulatory barriers that restrict the entry of private firms in domestic markets, and empirically often backfire, with many sheltered industries never really growing.
In fact, many of those fears can be mitigated by implementing an appropriate policy framework that encompasses the gradual opening of the market, along with a strong competition law and the corresponding enforcement agency. By and large, existing evidence shows that a well-crafted competition policy framework that is enforced effectively can help to improve welfare and other macro-economic outcomes, while preserving and growing the local industry.
Q: What are the policy implications of your analysis?
A: I would say that the policy implications are that it’s important to strengthen product market competition in sub-Saharan Africa. Some product market reforms were undertaken in several countries in the late 1990s and early 2000s and conferred growth gains, but the reform momentum has stalled in recent years. Although more and more countries have enacted competition laws since 2000, the fact is that progress on the ground remains limited.
Policies to improve competition need to be implemented following a holistic approach and encompass several elements. And this holistic approach consists first of product market reforms that reduce structural and regulatory barriers to private sector participation in the goods and services markets and improve the ease of doing business and reduce entry barriers. This is paramount.
Secondly, building an effective competition policy framework, consisting of an adequate competition law along with an independent, adequately funded, and staffed enforcement agency is crucial. Without teeth, such an agency will not be able to stimulate competition.
In addition, these actions must be accompanied by complementary policies. Think for instance of trade and foreign direct investment policies to bring foreign competition and improve access to intermediate inputs, as well as carefully designed fiscal policies and procurement systems that do not distort competition by benefiting a few well-connected market players. Also, in the current context of increasing regional trade and integration that will intensify under the African Continental Free Trade Agreement, co-operation among national competition authorities needs to be strengthened to tackle any anti-competitive practices of large pan-regional or international firms.
And finally, and this is more general, countries need to maintain a stable and sound macro-economic and institutional environment to attract private investment and ensure that policies to stimulate competition have traction.
Q: What are your views on how Zimbabwe can improve competition in its markets to enhance growth?
A: While competition policy is important, in the current Zimbabwean economic context, one could probably make the case that it is of secondary order. It will be crucial in the medium to long-run, but in the short-run, there are some policies that are likely to be more important to stimulate competition.
Right now, the focus should really be on stabilising the economy first. The unstable macro-economic environment hampers competition, by discouraging investment or entry of new firms for instance. As we have said in our recent communiqué on the Staff-Monitored Programme, policy actions are urgently needed to tackle the root causes of economic instability and to enable private-sector led growth.
The key challenge is to contain fiscal spending consistent with non-inflationary financing and to tighten monetary policy to stabilise the exchange rate and start rebuilding confidence. And the Government is moving ahead and has enacted some courageous measures, such as the recent elimination of the fuel subsidy. There is also a need to strengthen the foreign exchange market operations and improve the transparency on monetary statistics. The recently established Monetary Policy Committee will help on that front. It’s also critical to accelerate the path of international re-engagement, by fast-tracking the pace of political reforms. The government has expressed a commitment to move on all three fronts, but progress has been uneven, which has exacerbated economic instability.
Besides working on macro-economic stability, the authorities have also started to address structural impediments to growth. Several points come to mind here. First, the authorities have undertaken steps to reform and privatise inefficient state-owned enterprises. Reducing the inefficiency of these parastatals should have a positive effect on the economy.
Secondly, work is also ongoing on improving the ease of doing business, and the early results are telling. In the doing business ranking from the World Bank, Zimbabwe made commendable advancements, by moving 15 places from 155 to 140 in the most recent ranking. And Zimbabwe is also addressing areas in which it did not score well, such as getting electricity, enforcing contracts and trading across borders. On the issue of international trade, it’s important that Zimbabwe takes advantage of the 15-year derogation it got on the non-application of the African Continental Free Trade Agreement and improve its economic conditions, infrastructure investments, manufacturing sector’s capacity utilisation and ultimately competitiveness so that it benefits fully from the Trade Agreement. Finally, the authorities are also moving on addressing governance failures. Tackling corruption is important in its own right but is also crucial to ensure a level playing field among economic actors. And here, some progress is also visible, notably the work carried out by the Zimbabwean Anti-Corruption Commission and its actions against some prominent politicians. Nonetheless, we all recognise that more tangible results are needed. But all these measures point into the direction of improving competition going forward.
Once macro-economic stability is established, and the structural reforms are implemented, the conditions for effective competition policies are present. Ensuring that the Competition and Tariff Commission is not politicised, that it is adequately staffed and resourced, and that it has all the regulatory powers to carry out its responsibilities should eventually ensure stronger competition, employment growth and fair prices for consumers.