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The perils of competition

Zahid Hussain's picture


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 politics of rural electrification in Sri Lanka

Thilani L. Navaratne's picture

The 10th South Asian Economics Students Meet (SAESM) was held in Lahore, Pakistan, bringing together 82 top economics undergraduate students from the region. The theme was the Political Economy of South Asia, with a winning paper selected for each of the six sub-themes. In this post, Thilani Navaratne presents her winning paper on the political economy of energy and natural resource use. Posts from the other winning authors have also been featured on this blog, and can be found at the end of this post.

In the past, Sri Lankan policy makers and politicians paid considerable attention to creating surplus energy capacity at the national level in order to support rapid development while at the same time, embarked on rural development as a prime political initiative where the rural electrification infrastructure formed a crucial component of the policy framework.

I conducted an analysis of the dynamics and the characteristics of the political economy of access to energy in rural electrification in Sri Lanka. The study focuses on how national policies shaped rural energy access and what influence rural politics and demand at the grassroots level have had on the energy infrastructure.

In addition to that the study explores the budgetary policies that had a direct bearing on national energy policies, and more specifically in creating rural energy infrastructure itself.  While the provision of energy is the main component of rural energy access, the affordability of energy at rural level remains a key factor in the ultimate, tangible outcomes of energy usage. Clearly, rural economic development and enhancement of living standards are intrinsically linked with the degree of access to energy at affordable prices.

My paper finds that rural access to energy has come about both as a direct outcome of specific policies as well as a result of broader policies of rural development. Specific policies include the National Energy Policy which addresses the basic energy needs of the nation and sets out strategies to be followed to fulfil such needs. Much broader, macro level policies relating to Rural Development and energy accessibility are captured in the  “Mahinda Chinthana”- The long term plan for the future of the nation, presented by the governing regime and in the Ministerial Policies.

May 9, 2014: This Week in #SouthAsiaDev

Liana Pistell's picture
We've rounded up 30 tweets, posts, links, and +1's on South Asia-related development news, innovation, and social good that caught our eye this week. Countries included: Afghanistan, Bangladesh, India, NepalPakistan, and Sri Lanka. For regular #SouthAsiaDev updates, follow us on Facebook and Twitter

When Climate Becomes a Health Issue: How Vulnerable is Bangladesh?

Muthukumara Mani's picture


Photo by Mahfuzul Hasan Bhuiyan

Life for people living in the Jalekhali village of the Sathkira District in Bangladesh has not been the same since Cyclone Aila made landfull in 2009. In this coastal village, not only did people suffer in the aftermath of the cyclone, but health effects still linger from salinity intrusion into their ponds and other bodies of water. In addition to an increase incidence of water borne diseases among women and children, the increased intake of salt has resulted in increased prevalence of high blood pressure among pregnant women. The issue not only affects Jalekhali but is prevalent across coastal towns and villages in Bangladesh.  In many of these villages the ground well water is also contaminated with arsenic leaving the people with acute shortage of safe drinking water. 

Working Together to Save Water in Tamil Nadu

Ranu Sinha's picture


Female farmers in Tamil Nadu after attending a farmer training session in the village.

In India, the state of Tamil Nadu has about 4% of the geographical area of the country, 7% of the population and only 3% of the water resources. Hence, it is one of the most water stressed states in India and its crops rely on river water and monsoon rains. Yet, Tamil Nadu is one of the leading producers of agricultural products in India, famous for its turmeric and rice among others. Thus the need to conserve and manage scarce water resources is critical to the success of agriculture of the state, which accounts for more than 20% of its economy.

'This is our house now'

Onno Ruhl's picture


In Unit #95 (Photo: Martje van der Heide)

“This is unit number 95”, Preeti told me. “It is the standard model.” Geeta Devi the owner shook her head. “Look up”, she said, “This is our house.” I looked up and saw what she meant: there was a beautiful lotus flower design in the ceiling. “My husband made it” Geeta said proudly. “This is our house”.



The tireless Preeti works with village communities to help them build back better (Photo: Martje van der Heide)

Preeti Bisht is the community worker for SUDHA who is mobilizing the victims of the Uttarakhand floods in this small village on the Mandakini River, well on the way to Kedarnath. She took me all the way to unit number 107 and in passing showed me the school. I soon discovered that none of the house units were standard. Some people added a room, others an extra window in the kitchen to show the amazing view up river. And the houses that were already finished were painted in every color imaginable as houses in Uttarakhand are meant to be.

A Bird's Eye View Into the Mahatma Gandhi National Rural Employment Guarantee Act

Rumela Ghosh's picture

World Bank / Curt Carnemark
The 10th South Asian Economics Students Meet (SAESM) was held in Lahore, Pakistan, bringing together 82 top economics undergraduate students from the region. The theme was the Political Economy of South Asia, with a winning paper selected for each of the six sub-themes. In this post, Rumela Ghosh presents her winning paper on the political economy of social security. Posts from the other winning authors will follow over the next few weeks.


Employment is one of the burning problems affecting South Asia. India now has a diminished growth rate below 6% per year. In recent years although the living standards of the 'middle classes' have improved, reform for underprivileged groups has not been so exciting. According to National Service Scheme (NSS) data the average per capita expenditure rose at the exceedingly low rate of 1% per year in India. There has been a sharp decline in real agricultural wages also. A quantitative assessment of the impact of various rural wage employment schemes during the last two five-year plans and the current one shows that the results in terms of employment generated have been steadily decreasing.
 
My paper looked at schemes to tackle unemployment in India. A Bird's Eye View into Mahatma Gandhi National Rural Employment Guarantee Act firstly examines the Maharashtra Employment Guarantee Scheme (MEGS) introduced in the 1970s. It examines how at different time frames and contexts the elite managed to maintain their support base and reinforced its legitimacy by supporting a poverty alleviation program – the EGS. It also highlights the issue of gender concern and the problem of migrant workers.
 
Among various EGS, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is the flagship program implemented at the national level which achieved measurable success, though with some flaws. It guarantees every rural household up to 100 days of wage employment in a year within 15 days of demand for such employment. My study highlights the significant interstate differences in the supply of employment and tries to explore the reasons why. Supply falls far short of demand, particularly in low-income states, where the organizational capacity to implement the scheme is limited.

The paper examines the conceptual design and delivery of MGNREGA to assess its effectiveness against unemployment and poverty. I discuss existing labor laws applicable to workers in the unorganized sector covering wages, contract and poverty incidence. The paper also seeks to derive the short run and long run implications of a minimum wage law. A detailed empirical analysis of the spatial dimension of implementation, problems of funding, and budgetary incidence of MGNREGA.
 
A comparative study of MGNREGA scheme as implemented in Tamil Nadu where it is largely fair and corruption free with respect to that in Uttar Pradesh where the implementation has some serious flaws with corrupt practices of local officials paying wage payments to non-existing laborers has been illustrated. It studies the differences in utilization, extent of targeting, magnitude of income transfers and the cost-effectiveness of food subsidies.

I designed a game-theoretic model to design a near-perfect scheme with suggestions to eliminate the loop holes. Various falsified implementation strategies by contractors like fictitious names in muster rolls, commission to the contractor for partially/not working laborers has undermined the objectives of MGNREGA. This illegal money laundering from a subsidized scheme like MGNREGA digs a deep hole in India's economic pocket when the economy is reeling under inflation and rupee value depreciation pains. The model attempts a systematic game theory based solution approach for restricting these scheme implementation faults. A graphical presentation shows that, with such a policy laborers in the long run will have an incentive to deliver under MGNREGA only.

Kafala neither guarantees nor cares: guest workers in the Gulf

Zahid Hussain's picture

Thomas Sennett / World Bank
Guest workers have played an integral role in the Gulf since the 1970s where the demographic changes accompanying these labor flows occurred at an extraordinarily rapid pace. The region’s aggregate population has increased more than tenfold in a little over half a century, but in no other region of the world do citizens comprise such a small proportion of the population. While this ‘demographic imbalance’ makes the Gulf unique, what differentiates it is not its economic and demographic expansion through migration but the degree to which the region’s governments have excluded foreign workers from being integrated into the national polity. This exclusion of foreign workers is a result of a conscious policy.
 
Labor migration to Gulf Cooperation Council (GCC) countries are mostly governed under a sponsorship system known as Kafala.  Migrant workers require a national sponsor (called Kafeel) and are only allowed to work for the visa sponsoring firm. The workers must obtain a no-objection certificate from the sponsor to resign and have to leave the country upon termination of the usual 2 to 3 years’ contract before being allowed to commence a new contract under a new sponsor. Tied to the sponsor, the migrants become immobile within the internal labor market for the duration of the contract. Consequently the sponsors benefit from non-competitive environments where they extract substantial economic rents from migrant workers at the expense of inducing significant inefficiencies in production.
 
The Kafeels pay workers an income above the wage in their country of origin and obtain economic rents equal to the difference between such earnings and the net marginal return from employing the migrant worker. Migrant workers are paid the initial nominal wage throughout the entire contractual period. They are even made to accept lower wages than contracted initially. Immobilized by labor restrictions, workers cannot command a higher wage even when there is demand for their services by rival firms willing to hire them in order to avoid the cost of hiring from abroad.  Kafeels have also found other ways of extracting rents in recent decades by indulging in visa trading.  They allow their names to be used to sponsor foreign workers in exchange for monetary gains.
 
Arguably, rents per-se should not directly create adverse effects because they are essentially redistributive transfers. Earnings paid to migrants are sufficient to motivate them to migrate. The migrants do not leave. But this view is over-simplistic. The combination of short contracts, flat wages, and lack of internal mobility kills the incentives for migrant workers to exercise higher effort levels in production and engage in activities that enhance their human capital.  Any productivity gain would go to the sponsor in the form of rents. The system provides incentives to entrepreneurs to concentrate on low-skills, labor-intensive activities where the extraction of economic rents is easier. Such sponsor-worker behavior explains for instance why despite the massive investments in Dubai, the economy-wide efficiency levels (average labor productivity) have not improved in the last two decades while in Hong Kong, they doubled and in Singapore quadrupled.

How Can You Build Trust between Communities and the Government in Afghanistan?

Miki Terasawa's picture



Learning from a Social Accountability Pilot in the Mining Sector

 
The Aynak copper mine in the Mohammad Agha district in Logar province is being developed as one of “resource corridors.” These corridors will connect communities with the benefits of mineral resources and infrastructure which will provide over 10,000 estimated jobs and economic growth in Afghanistan.
 
In facilitating community participation to make the most of the potential growth opportunity, the World Bank supported the Ministry of Mines and Petroleum (MoMP) pilot a small social accountability project in Aynak, to bridge trust between MoMP and affected communities by making a grievance redress mechanism (GRM) work. GRM is a feedback mechanism based on two-way communication, in which the government takes action or shares information based on community feedback.  
 
The Aynak mine development directly affected 62 families in two villages who had to be relocated. The MoMP prepared a resettlement action plan (RAP), which laid out compensation for these affected families and outlined the GRM, including setting up of the district-level grievance handling committee to address resettlement related complaints. Initially, there was no representation in the committee from two communities, and they were not clear on their roles.
 
The social accountability pilot supported community mobilization, training on entitlements and GRM, and election of Community Development Council (CDC), following the procedure set by the National Solidary Project (NSP) implemented by the Ministry of Rural Rehabilitation and Development. These activities were facilitated by a civil society organization (CSO), the International Rescue Committee (IRC), which had a long-established presence in Mohammad Agha district and was also a NSP facilitating partner in the district. 

Advancing Climate and Disaster Resilience in Sri Lanka

Suranga Kahandawa's picture


The 2004 Indian Ocean Tsunami – Triggering engagement in Disaster Risk Management (DRM)

 
In 2004 December, Sri Lanka faced the worst disaster in its history - the Indian Ocean Tsunami. More than 35,000 people lost their lives and around 5,000 people went missing. At the time of the Tsunami, Sri Lanka did not have a proper legal and institutional mechanism to manage disaster risk. In the aftermath of the catastrophe, the Government made very serious efforts to establish a mechanism to avoid dramatic loss of life in future disaster events.
 
Subsequently, the Disaster Management Act was passed and the National Council for Disaster Management, chaired by the President, was established.  A Ministry of Disaster Management (MoDM) was created and charged with the disaster risk management (DRM) portfolio and the Disaster Management Centre (DMC) was established July 2005 to implement DRM programs across the country.
 
With these mechanisms in place, the Government began strengthening disaster preparedness, especially for tsunamis. Three pieces were put in place including: i) development of a tsunami early warning system; ii) implementation of awareness raising programs, from the grassroots to national levels; and, iii) regular evacuation drills were conducted in all coastal villages. The system has proven successful as the DMC issued Tsunami evacuation warnings in September 2007 and April 2014, which resulted in the safe evacuation of coastal communities.

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