Competition and Product Market Governance in Developing Countries
In this section, we argue that product market governance systems can be analysed as the articulated bodies of formal or informal rules (product market regulation, including trade and investment regulations, business rules) and policies (taxation, infrastructure provision, direct state intervention on goods market) aimed at organizing an optimal level of competition on goods markets.[1] As explained above, this optimal level of competition is highly dependent on the level of development and resource endowment, but also on historically inherited social preferences. The perimeter of the product market governance is, therefore, broader than that of mere competition policies, whose focus is generally restricted to the rules governing competition between firms and market entry. Product market governance is the product of complex interaction between four actors: government, incumbent firms, competitors and consumers. Developing countries exhibit a huge variety of national forms of goods production and exchange (Amsden 1989; Wade 1989; Subramanian and Roy 2003; Acemoglu et al. 2003; Rodrik 2008a, b).
Country-specific political compromises between the state, banks and industrial firms condition the shape of competition governance.
In some historical cases, these national compromises led to economic successes, such as the East-Asian miracle. In Korea and Taiwan, broad growth coalitions, marshalling the government, its administration and private business, have succeeded both in setting up the conditions needed for sustained growth, and making them legitimate for the majority of their populations (World Bank 1993; Evans 1995; Ranis 1995). By contrast, in Africa, Latin America or the Middle East, ruling coalitions have built statist centralized politico-economic systems, often financing “factional- distributive” policies by natural resource rents, with only limited impact on long-term growth (Rougier 2016). Significant product market rigidities there have generally led to resource misallocation, corruption and economic failures (Rodrik 2003; Robinson 2009; Cammett et al. 2015).
State interventionism in goods markets prevails in most developing economies. The specific form of state interventionism used by a country can exert considerable impact on its economic development. In an influential paper, Hall and Jones (1999) showed that the labour productivity gap between developed and developing economies can be explained by differences in governmental diversion of resources.[2] Several years earlier, Mauro (1995) had also found that corruption reduces investment and economic growth. Given that a stricter regulation of entry tends to be associated with higher levels of corruption, excessive entry regulation traditionally ends up by benefiting the regulators or a limited number of politically connected incumbent firms in developing countries (Faccio 2006; Acemoglu and Johnson 2011). Any attempt to characterize developing economies’ product market regulation should, accordingly, account for corruption and all other forms of state or administrative protection.
A related issue is the importance of informality in most developing countries’ goods markets. Excessive market regulation or political control over economic resources may drive potential entrepreneurs to carry out their activities in the informal sector. In poor economies’ informal sectors, contract enforcement is generally low, with business coordina?tion essentially operating through personal ties, network building and informal rules of behaviour (Fafchamps 2004; Berrou and Combarnous 2011). Because of the lack of legal recourse, economic agents spend significant amounts of resources setting up long-term relationships, thereby limiting their capacity to invest in capacity or productivity. As a consequence, a high degree of informality generally leads to small-sized businesses and low sectoral concentration. Informal ties are, by nature, very hard to measure, especially at country level. In addition, the extent of informal activities is not necessarily a good predictor of the extent of production networks in developing economies.
Our analytical framework is described in Fig. 6.1. The top left cell features each country’s broad institutional conditions: complementary labour and financial institutions, norms and values, or legal origin. The competition regime, that is, the model of product market institutional governance, refers to the role played by government, local businesses, transnational companies and market actors, and their coalitions. Product market governance determines competitiveness and other related competition outcomes such as entry rates, margins, concentration, comparative
Fig. 6.1 Analytical framework for comparing competition and product market governance advantage, rents or innovation. The bottom left cell is related to the mobilization patterns and political processes impacted by competitiveness and competition outcomes, but these processes and patterns also determine, in turn, the institutional structure of the competition regime.
In the next section, we present the indicators that we have selected to characterize competition regimes.
- [1] Except for Amable (2003), CC does not always make a clear and systematic distinction betweenthe different domains pertaining to the production domain, broadly defined by Soskice (1999: 101)as “the organization of production through markets and market-related institutions”. Accordingly,it articulates such dimensions as industrial and labour relations, competition policies, as well as thefinancial system (Hall and Soskice 2001).
- [2] They averaged, for 1986—1995, five International Country Risk Guide scores assessing the government’s role in protecting against private diversion: (i) law and order, (ii) bureaucratic quality, (iii)corruption, (iv) risk of expropriation, and (v) government repudiation of contracts.
