Greater competition is crucial for creating better jobs, although there may be short term tradeoffs.
Job creation on a massive scale is crucial for sustainably ending extreme poverty and building shared prosperity in every economy. And robust and competitive markets are crucial for creating jobs. Yet the question of whether competition boosts or destroys jobs is one that policymakers often shy away from.
It was thus valuable to have that question as a central point of discussion for competition authorities and policymakers from almost 100 countries – from both developed and developing economies – who recently gathered in Paris for the 14th OECD Global Forum on Competition (GFC).
According to World Bank Group estimates the global economy must create 600 million new jobs by the year 2027 – with 90 percent of those jobs being created in the private sector – just to hold employment rates constant, given current demographic trends.
Yet the need goes further than simply the creation of jobs: to promote shared prosperity, one of the urgent priorities – for economies large and small – is the creation of better jobs. This is where competition policy can play a critical role.
Competition helps drive labor toward more productive employment: first, by improving firm-level productivity, and second, by driving the allocation of labor to more productive firms within an industry.
Moreover: Making markets more open to foreign competition drives labor to sectors with higher productivity – or, at least, with higher productivity growth. Making jobs more productive, in turn, generally increases the wages they command.
That’s in addition to cross-country evidence on the impact of competition policy on the growth of Total Factor Productivity and GDP, and the fact that growth tends not to occur without creating jobs. Thus there’s compelling evidence that – far from being a job killer, as skeptics might fear – competition (over the long term) has the potential to create both more jobs and better jobs.
The key question then becomes whether such long-term benefits must be achieved at the expense of short-term negative shocks to employment – especially in sectors of the economy that may experience sudden increases in the level of competition.
Progress toward better jobs is driven partly by the disappearance of low-productivity jobs, as well as the creation of more productive jobs in the short run. Competition encourages that dynamic through firm entry and exit, along with a reduction in “labor hoarding” in firms that have previously enjoyed strong market power.
Greater competition is crucial for creating better jobs, although there may be short term tradeoffs.
In some areas of development policy, deep-rooted assumptions are extremely hard to dislodge. Like science-fiction androids or the many-headed Hydra, these are monsters that can sustain any number of mortal blows and still regenerate. Capable researchers armed with overwhelming evidence are no threat to them.
The importance of good governance for development is one such assumption. Take last month’s enquiry report on Parliamentary Strengthening by the International Development Committee of the UK parliament. It references the UN High Level Panel’s opinion that ‘good governance and effective institutions’ should be among the goals for ending global poverty by 2030. It would have done better to reference the evidence in 2012’s rigorously researched UN publication Is Good Governance Good for Development?
Here are five governance myths about which the strong scientific consensus might – eventually – slay some monsters.
Promoting competition is considered the best available option for increasing economic well-being. The recent global financial crisis prompted policymakers to reconsider basic assumptions, but the virtues of competition were not among them. However, gone are the days when practitioners slept sound thinking the economy, if left alone, is self-correcting.
The limitations of competition as a force for universal good are well-known. Consumers can be inadequately informed, making it possible for firms to take advantage of them. The intrinsic difficulty of matching skills to positions and the costs associated with moving jobs may make workers stay with abusive employers. More basically, in a world where people have imperfect information and workers can’t always leave their employer, firms may be able to respond by cutting corners and abusing consumers and workers.
Is the problem with competition itself or the legal and informal institutions that yield this type of competition? The answer depends in part on one’s ideological lens—namely the belief of competition existing outside a regulatory framework, necessitating governmental intervention in the marketplace versus the belief that regulatory forces help create, define, and nurture competition in the market, necessitating improvements to the legal framework if competition is failing.
Some policies that supposedly restrict competition are justified for promoting competition. Intellectual property rights, for example, can restrict competition along lets say the use of a trade name. But the argument is that intellectual property and antitrust policies complement, rather than conflict, one another in promoting innovation and competition.
Life will surely be more stressful if we needed to compete for everything. Cooperation is often more relaxing. Society and competitors at times benefit when rivals cooperate in joint ventures to address collective needs. Competition can make people less cooperative, promote free-riding, and reduce contributions to public goods, thus leaving society worse off.
The point is not all forms of competition are beneficial. Just as athletic contests distinguish between fair and foul play, the law distinguishes between fair and unfair methods of competition. Bangladesh’s garment industry is a contemporary case in point. The collapse of Rana Plaza in Bangladesh brought to the fore the pathetic state of working conditions in many factories serving the global supply chains. The structure of the supply chain itself—the relationship among regulators, buyers, suppliers, and workers—is fundamentally related to these problems.
The practice of subcontracting is routine in Bangladesh’s garment industry. The prevalence of competitive indirect sourcing strategies has resulted in a supply chain driven by the pursuit of nominal cost minimization. It has increased risks for business and workers by undermining prices, wages, working conditions, and investment in productivity and quality. The apparel units engaged in sub-contracting are mostly non-compliant particularly in paying wages and maintaining safety standards.
Question is why do compliant factory owners take recourse to such sub-contractors? Major global buyers see Bangladesh as a market where they can obtain the most competitive prices for a high volume of lower end products. Consequently, they set low price targets. The manufacturers compete for large orders by undercutting each other, further driving down the prices. They make delivery commitments far in excess of their capacity to produce without breaching compliance. When prices are dramatically driven down, the natural tendency of a garment manufacturer is to manage their unit at a least cost with regard to overheads and wages. The pressure to drive these down arise inevitably.
The remittances sent home every year by the African Diaspora should create a doorway to still greater opportunities, and the key to this door is financial access. While remittances do impact the living standards of beneficiaries directly, the banks that pay out the remittances month after month should offer recipient families a basic financial package including savings accounts, payment services and small loans for microenterprise. This should facilitate growth from current levels of remittances saved and invested. Leveraging of remittances through financial inclusion is certain to increase their development potential.
The Tata Group, in partnership with the Indian Institute of Management Calcutta (IIMC),has launched the ‘Tata Social Enterprise Challenge’, a quest to find India’s most promising social enterprises. The goal of the challenge is to create an ecosystem for social entrepreneurship and encourage sustainable, scalable and measurable social impact. Selected social entrepreneurs will be offered mentorship support, funding opportunities and an opportunity to be incubated at IIM Calcutta’s Incubation Centre
Teams who either have an early stage venture (not older than 3 years) or a promising idea with a plan that can create sustainable social impact can submit their business plans online by logging onto http://www.tatasechallenge.org.
Apps For Climate enters a new phase this week. The World Bank’s innovation competition, which was launched at COP-17 alongside the Open Climate Data Initiative and the Climate Change Knowledge Portal, attracted about 50 qualifying entries. These are now on public display on the Apps For Climate website. Take a look.
For those who have been watching the competition and wondering what developers might cook up, now comes the fun part: trying out the dozens of interesting apps and voting for your favorites. Voting for the Popular Choice category is now open and runs through April 27, 2012, with the winner receiving US$5,000. The entry pool contains something for everyone, including web apps, mobile apps, visualization programs, and games. Some apps focus on taking actions to reduce greenhouse gas emissions and others on different aspects of development and adaptation.
Formal judging also kicks off this month. The judging panel includes Christiana Figueres, Rachel Kyte, Rajendra Pachauri, Juliana Rotich, Andrew Steer, and Patrick Svenburg. This group will be reviewing the qualifying entries, and making awards based on originality, design, performance, and potential impact. We will announce these awards in June. There are 15 awards in all, with the first place winner receiving US$15,000.
Henry Ford once famously said that if he had asked his customers what they wanted they would have asked him for a faster horse. If he had listened to his customers, the Ford Motor Company may never have existed, or would be called the Ford Faster Horse Company. The automobile became what is called a “disruptive innovation” meaning that it radically displaced the incumbent technology (the horse and carriage) by not listening to the demands of mainstream consumers, but trying to uncover their real needs.
This is the approach the World Bank is now prototyping in Indonesia: Trying to uncover the real clean energy needs of rural communities by understanding their underlying energy-related problems rather than simply asking them what technologies they want. The Indonesia Green Innovation Pilot Program is prototyping a new approach to fostering green disruptive innovation. The first stage of the program is being launched this week, and consists of identifying possible challenges – or problems – linked to energy in rural communities. In keeping with the logic of disruptive innovation, the program does not start with a market demand study, or a survey of clean energy solutions in the market, but with uncovering stated and unstated needs that affect the population of a rural community in their everyday lives. This is being done in three ways: One is through field research by a team of designers from Inotek and Catapult Design, a second way is through consultative workshops in Jakarta and in the rural communities, and a third is through a “call for challenge” where the program is using a crowdsourcing approach to collect problems linked to energy in rural Indonesian communities. If you are in any way familiar with rural Indonesia and its energy challenges, the program invites you to submit a challenge through this website.
When the World Bank launched the Open Climate Data Initiative and the Climate Change Knowledge Portal last December, the goal was to make essential climate and climate-related data more readily available to the development community and others trying to address the difficult challenges posed by a changing climate. As was noted at the launch event, making data available is “one of the crucial steps toward building resilience to climate change,” as countries consider a range of measures to protect ecosystems, key infrastructure, and adapt critical economic sectors such as water and agriculture.
Availability of data, however, is only one piece of the puzzle. For example, while the Climate Change Knowledge Portal helps users interpret climate data in the context of development, it does not by itself provide solutions for all sectors or users. So what can we do to encourage the transformation of data into simple and innovative solutions and decision-making tools that accelerate climate resilient development?
Accelerating this transformation is the impetus behind Apps For Climate, an innovation contest currently underway and running through March 16 2012. Apps For Climate encourages people or organizations (World Bank employees are not eligible) to create climate data “apps”—an intentionally ambiguous term for anything from a website to a mobile app to a widget—and enter them in the contest. Winners, as determined by a judging panel, receive prizes up to $15,000, along with public recognition for their efforts. Such contests are increasingly popular tools for organizations to encourage innovative thinking and engagement beyond their traditional audiences. For instance, Apps For Development, the World Bank competition on which Apps For Climate is modeled, received over 100 submissions in 2011, many from developing countries.