Competition Policy and Growth: International experience and implications for the Russian Federation

Pedro Alba Country Director, Russia The World Bank Session 1: Federal Aspects of Competition: the Role of the Government in Putting in Place a Competitive Environment

Key Points & Plan of the Presentation

Key Points:   Competition is important. It leads to more productive

and nimble firms, and thus higher growth.   Countries have successfully improved their

competition policies - EU, Australia, Canada, etc.   Russia has not focused as much on competition policy

and can reap substantive benefits by doing so.

Plan of the Presentation: •  Part I: The International Experience •  Part II: The Case of Australia and EU •  Part III: Implications for the Russian Federation

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Economic Growth and Diversification: A Conceptual Framework

Institutions/ Incentives

Governance, Rule of Law and Competition

Other Factors: Geography (Location,

Climate), Natural Disasters; Civil

Wars; Other External Shocks

Input Markets: Labor, Capital,

Technology, Land

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The government can affect competition through:

 Competition law

 Entry and exit regulations

 Red tape and access to state aid (rivalry);

 FDI and Trade Policy (International and Potential competition)

 Regulation of Infrastructure and Service Sectors

Firm Productivity

A post-crisis role of the state

Competition, Entry and Economic Growth: Empirical Evidence

5 Source: Dutz, M. and Khemani, S. (2006)

Competition and Economic Development: Developed Economies in the Last 10 years

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OECD Economies have been reforming the regulatory policies of their product markets to foster competition and improve productivity.

1998 ave. 2.16

2008 ave. 1.36

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Aus

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Can

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epub

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Gre

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Hun

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elan

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Ita

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eden

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Uni

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Product Market Regulation in the OECD

1998 2008

Source: Graph from Indicators of Product Market Regulation Homepage - OECD, 2009

The example of Australia

Restrictiveness of Regulation in energy, transport and communications sectors

Microeconomic Evidence: Mark-up and Domestic Competition - An international

comparison

Pharmaceutical Products 117

116

114

112

108

110

112

114

116

118

Romania Serbia UK Germany

Wearing Apparel

114 112

106 106

102 104 106 108 110 112 114 116

Romania Serbia Germany UK

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Source: Based on EBRD Report (2009)

Costs in Romania would have to be reduced by 8% so the price equalizes with the price in the UK.

Low domestic competition also translates into lower international price-competitiveness

“ Contrary to some popular views, our results suggest that Japanese competitiveness is associated with home market competition, not collusion, cartels or government intervention (…) We find a positive and highly significant relationship between the extent of the market share fluctuations [a measure of local rivalry] and trade performance” -- Michael Porter

Source: Sakakibara, M and M.E. Porter: “ Competing at home to win abroad: Evidence from Japanese industry”, RES, May 2001 .

Costs in Romania would have to be reduced by 5% so the price equalizes with the price in Germany

Competition, Productivity and Growth: A Historical Perspective (the case of the EU)

History of economic development in Europe: Competition…

Year      EU  (Ini,al)  Labor

productivity % of U.S.  

1939-­‐59     53  

1973   78  

1983   84  

1993   102  

… and competition law and policy are intertwined.

Treaty of Rome (1957): An active competition policy going beyond business behavior

“ Save as otherwise provided in this Treaty, any aid by a Member state through State resources in any form whatsoever which distorts or threatens competition by favoring certain undertakings or the production or certain goods, shall, in so far as it affects trade between member states, be incompatible with the common market”

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YET, most politicians and policymakers doubt its importance until today.

Competition Policy in Action: The Australian Experience – “What”.....

Australia’s competition oriented reforms happened in three waves: 1.  Increasing exposure to international market (early 90s) 2.  Development and Implementation of a National Competition Policy (NCP) (based

on the landmark Hilmer Report – mid 90s) 3.  Regular updates of the National Competition Policy (late 90s onwards)

Developing a political consensus among Australia’s regional governments

-  Pressure from the business sectors exposed to international competition (agriculture and large enterprises) pushed for reforms of nation-wide infrastructure (energy, ports).

-  Establishment of a formal Council of Australian Governments and continuous meetings with all levels of government in special Premiers’ Conferences => creation of a formal institutional setting for cooperation on the reform agenda

=> recognition of the importance of nationwide competition as a driver of enhanced productivity and higher living standards.

Comprehensive reforms coordinated across all levels of government aimed to:

–  Reform all legislation that restrict competition –  Implement a culture of “continuous improvement” in regulatory quality –  Implement competitive neutrality for all govt. businesses –  Provide third-party access to significant infrastructure facilities

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•  NCP ‘competition payments’ made from federal to state governments that implemented specific reforms

•  Pecuniary penalties imposed on slow reformers (with reduced or delayed budget transfers from the central government)

•  Payment represent the State’s share of additional revenue arising from the NCP

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.... and “How”– The NCP’s incentive payments

State government NCP payments and penalties

The NCP has reduced barriers to entry and exit and improved competition It is estimated to have increased GDP by 2.5% (excluding dynamic effects)

How do we measure competition? Product Market Regulation (PMR)

- Three sub-indicators: (i)  State control;

(ii)  Barriers to entrepreneurship

(iii)  Barriers to trade and investment

- Higher indicator value signify a more restrictive regulatory environment.

-  Integration of 18 low-level indicators, capturing specific features of the regulatory system, including sector-specific regulation.

-  ‘Objective’ data measurement of rules and regulations => suitable for productivity estimates as well as time and country comparisons.

- Regional PMR - useful in cases where regulatory responsibilities are split between federal and regional governments.

Doing Business (DB) - DB provides an objective basis for

understanding and improving the regulatory environment for business, and encourages countries to compete towards more efficient regulation.

- Focus on life cycle of a domestic small to medium-size firm from start-up and operations to closing a business.

- 11 indicators based on a standardized case scenarios. The smaller the rank the easier to do business.

- Since 2003. Now 183 countries - represented by their largest business cities.

- Source of information: contributions of lawyers, accountants, judges, business people and public officials; over 8,200 respondents in 2011 .

- Subnational DB series started in 2005 covered 299 cities in 42 countries.

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What can a good competition framework do for the Russian Economy?

Implications for the Russian Federation (I) Second most restrictive product market

regulations among measured economies in 2008

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0.0  

0.5  

1.0  

1.5  

2.0  

2.5  

3.0  

3.5  

U.S.  

Ireland  

Nethe

rland

s   Spain  

Japan  

Switzerland

 

Australia  

Hun

gary  

Estonia  

Italy  

Portugal  

France  

Korea  

Chile  

Slovakia  

Brazil  

Turkey  

Israel  

China  

Russian Federation

  This asymmetry is particularly acute at regional level and a source of regional variability in the broad competition regime.

  Regional authorities still grant special tax or credit preferences to build local business champions, with strong variation across regions.

Unequal application of existing regulations and asymmetric access to state aid favor larger, less productive incumbents to the detriment of smaller and more efficient firms and potential entrants. These market distortions are sector specific and take many different forms.

Much scope for improving product market regulation in Russia, particularly in state regulation.

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

United States OECD Chile Brazil Russia China

State control Barriers to entrepreneurship Barriers to trade and investment

Implications for the Russian Federation (II)

 A broad unfinished business environment reform agenda to ease new firm creation and exit of inefficient incumbents – as shown by the results of the recent Doing Business 2011

 Sub-national Doing business data show significant regional disparities => important part of the reform agenda in the hands of regions

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Doing Business in Russia 2009: Variations across cities show potential for learning from existing local best practices

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Indicator Best practice Difficult

Procedures to start a business Moscow (9 procedures) Voronezh (14 procedures)

Days to start a business Rostov-on-Don (22 days) Petrozavodsk (37 days)

Cost to start a business Kazan (3,000 rubles) Moscow (6,200 rubles)

Procedures to deal with construction permits Rostov-on-Don (22 procedures) Moscow (54 procedures)

Days to deal with construction permits Rostov-on-Don (194 days) Voronezh (1,207 days)

Cost to deal with construction permits Petrozavodsk (270.3% GNI) Moscow (2,612.8% GNI)

Procedures to register property Kazan, Voronezh, Rostov-on-Don (5 procedures) Petrozavodsk (7 procedures)

Days to register property Tver (48 days) St. Petersburg (117 days)

Cost to register property Kazan (16,706 rubles) Rostov-on-Don (40,360 rubles)

Time to export Kazan (24 days) Moscow (36 days)

Time to import Voronezh (23 days) Moscow (36 days)

Cost to export Petrozavodsk (1,050 USD per container)

Moscow (2,150 USD per container)

Cost to import Petrozavodsk (933USD per container)

Moscow (2,150 USD per container)

Implications for the Russian Federation (III) As part of a broader collaboration in the area of export diversification, the

Bank is working with the MoED in assessing the key obstacles to competition in the Russian Federation:   Review of the anti-competitive effect of key regulations and policies   Selected sector studies   Data Generation:

-- Regional Doing Business -- Regional PMR -- Calculation of sector markups

Some remaining questions:   Does Russia need a national competition policy?   How to bring full political support for such sensitive questions?   What should be the priorities?   How to align interests of different levels of the administration?

(Reward/Penalty scheme between federal and state levels?)

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Implications for the Russian Federation (IV)

Economic (export) diversification through competition and innovation

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Export Diversification

Sustaining and expanding sales in foreign markets

Breaking into foreign markets

Emergence of productive and innovative firms

Lower costs; better quality; more exporters

New products (New exporters)

Industrial Policies Innovation Policy

Access to inputs at competitive

prices

Competition Policy

Thank you Pedro Alba

…

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Annex 1: The integrated PMR indicator

19 Source: Wölfl, A., I. Wanner, T. Kozluk, G. Nicoletti (2009), "Ten years of product market reform in OECD countries – insights from a revised PMR indicator", OECD Economics Department Working Paper No 695, OECD, Paris.

Topic World’s top ranked 2009/10

Russia ‘s ranks per indicator

Starting a business New Zealand 108

Dealing with construction permits Hong Kong SAR, China 182

Registering property Saudi Arabia 51

Getting credit Malaysia 89

Protecting investors New Zealand 93

Paying taxes Maldives 105

Trading across borders Singapore 162

Enforcing contracts Luxembourg 18

Closing a business Japan 103

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Annex 2. Russia’s rankings in Doing Business 2011 by topic

Annex 3: Subnational Doing Business in Russia

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First Round – 2009: Measured business regulations and their enforcement in 10 cities in 4 of the 10 Doing Business areas:

"  Starting a business "  Dealing with construction permits "  Registering property "  Trading across borders

2nd planned round - 2011: 30 cities. Same indicators, but Trading across borders indicator will be replaced by the new 11th Getting Electricity indicator

2009 Doing Business ranking

1 KAZAN (EASIEST)

2 TVER

3 PETROZAVODSK

4 ROSTOV-ON-DON

5 TOMSK

6 IRKUTSK

7 PERM

8 ST. PETERSBURG

9 VORONEZH

10 MOSCOW (MOST DIFFICULT)

Firm-level data indicate that competition in Russia lags behind levels in Eastern Europe…

79 78 70

66 64 62 60 55 53 51

47 45 42

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% of firms facing more than 5 competitors for their main product line

22 Source: Enterprise Surveys (BEEPS) Firms were asked the question: How many competitors does this establishment’s main product line face?

…as does the importance of import competition.

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% of firms considering foreign competition as very important when deciding to innovate

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Source: Enterprise Surveys (BEEPS) Firms were asked the question: How important is pressure from foreign competitors in affecting decisions to develop new products or services and markets?

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•  Competition is one of the factors affecting the incentive regime in a country (for cost reduction; quality improvement, innovation – productivity gains). •  Potential gains that can be realized through good competition framework include: greater consumer welfare and economic efficiency in form of lower prices, greater choice and variety of goods and services, innovation, reduced costs and better allocation of resources. •  Empirical evidence shows strong correlation between higher GDP per capita and local markets where competition is more intense in most industries. •  History of economic development in Europe (increased productivity through creation of a single market [Treaty of Rome]) shows that competition and competition policy are intertwined •  OECD Economies have been reforming the regulatory policies of their product markets to foster competition and improve productivity, as shown by the PMR indicators. •  Measures of mark-ups also indicate that low domestic competition translates into lower international price-competitiveness •  The Australian case:

- successfully transformed its national competition policy by opening up to international competition and eliminating trade barriers among its states, thus conforming to competitiveness levels of leading world economies. - The National Competition Policy (NCP) was implemented through an incentive scheme in which the national government financially rewarded (punished) achievements of negotiated milestones. Through preparation of the parliamentary Hilmer Report in the early 1990s as well as the key role held by the parliament in monitoring the implementation of the main policy recommendations, the extensive reforms gained broad consensus at highest political (federal and regional) levels.

Key points

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•  Competition can be measured in different ways:  The economy-wide OECD Product Market Regulation (PMR) indicators are used to measure the extent to which policy settings promote or restrict competition in areas of the product market where competition is viable. Indicators cover formal regulations in: (i) state control of business enterprises; (ii) legal and administrative barriers to entrepreneurship; and (iii) barriers to international trade and investment.  The World Bank Group Doing Business report assesses the regulatory environment faced by a domestic small to medium-size firm from start-up and operations to closing a business through 11 indicators.

•  PMR shows that Russia has the second most restrictive product market regulations among measured economies in 2008 (after China). •  DB data shows that Russia has a broad unfinished business environment reform agenda to ease new firm creation and exit of inefficient incumbents. •  Looking at the regional level, the picture appears more nuanced. Sub-national Doing business data show significant regional disparities => important part of the reform agenda in the hands of regions •  Thus, the World Bank will be working with the MoED in assessing key obstacles to competition in the Russian Federation both at the federal and subnational levels through:

- Review of the anti-competitive effect of key regulations and policies - Selected sector studies - Data Generation: Regional DB, Regional PMR, Calculations of mark-ups

•  Additional slides in Annex on: - PMR indicator breakdown (Russia is weak in state regulation) - Russia ranks low in most DB indicators internationally, especially dealing with construction permits and trading across borders - Planned 2nd round of regional DB - BEEPS results indicate low competition in Russia relative to emerging economies in the ECA region