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Law and Regulation

Opening markets: Mexico uncovers and slashes local barriers to competition

Marialisa Motta's picture

In the state of Chiapas, Mexico — where nearly 1 million people live in moderate to extreme poverty — bus fares have been too high, and the availability of buses has been limited. Over four years, consumers on a single route have paid $2.5 million more than necessary. Tortillas in states across Mexico are more expensive than they need to be. In one state, firms overcharge for road construction by an estimated 15 percent, making it difficult to provide the high-quality transport services for cargo and construction materials that are necessary to build a logistics hub to diversify the state economy beyond petroleum. Another state has a very dynamic economy, hosting a greater density of industrial parks than comparable states. Given the positive spillover effects — industrial activity boosting local employment, demand, and purchasing power — the state expected growth in retail markets. Yet, stores have not been opening. Yet another state relies on tourism to generate business opportunities and jobs, including for poor people. However, until recently, tourists found that commercial establishments in the state’s primary municipality closed in the evenings and at night, often preventing them from going shopping.
 
What do these examples have in common? Local barriers to competition.

In the past few years, the Mexican Federal Competition Authority (COFECE) and Better Regulation Authority (COFEMER), internationally recognized institutions, as well as the World Bank Group, have pointed out that subnational regulations restrict competition in local markets. In many municipalities in Mexico, regulations and government interventions allow market incumbents to deny entry to new firms, to coordinate prices, to impose minimum distances between outlets, or to grant incumbents exclusive rights to artificially protect their dominant position. In total, a lack of vigorous marketplace competition costs the Mexican economy about one percentage point of GDP growth each year – a shortfall that affects the country’s poorest households by an estimated 20 percent more than its richest households. Most countries, however, have never systematically scrutinized local barriers to competition.


 
To address such issues effectively, competition policy experts from the World Bank Group’s Trade & Competitiveness Global Practice have developed an innovative tool – the Subnational Market Assessment of Competition (SMAC) – to systematically identify, prioritize and support the removal of local barriers to competition. (The SMAC is built from the World Bank Group Markets and Competition Policy Assessment Tool, or MCPAT.) The World Bank Group designed the SMAC to prioritize the reform of the rules and practices that most severely prevent healthy competition in the primary sectors for each state’s economic development.

Toward a more durable form of globalization, beyond 'neoliberal' negligence

Christopher Colford's picture

“Globalization and technological change create huge challenges for modern economies, but they are not uncontrollable forces of nature. The economy we have is the economy we choose to build. It is time to make different choices, and show that capitalism can be remade.” — Prof. Mariana Mazzucato of the University of Sussex and Prof. Michael Jacobs of University College London, the editors of “Rethinking Capitalism.”

The shadows lengthen and the daylight shortens amid these elegiac end-of-summer evenings — but there’s a palpable feeling nowadays, in Washington and other capitals, that we’re approaching not just the sunset of a season, but the twilight of an era.

The sudden change in the policy discourse over the past year has shattered the familiar old contours of the globalization debate, with a “populist explosion” in the world’s developed economies forcing policymakers everywhere to reconsider the boundaries of “the art of the possible.” In many of the world's developed economies, a recalibration of globalization is under way.

In this insolite interim, the fraught phrase of Antonio Gramsci comes to mind: “The crisis consists precisely in the fact that the old is dying and the new cannot [yet] be born. In this interregnum, a great variety of morbid symptoms appear.”

Three incisive recent analyses illustrate the impassioned arguments that underscore this end-of-an-era feeling. Together, the analyses set the stage for the imminent publication of a new book of essays by a group of eminent economists, whose ideas may chart the way toward a more durable, more inclusive approach to globalization.

 
  • Second: Diagnosing how a phase of economic history may have run its course, Nobel Prize-winner Joseph Stiglitz (a former Chief Economist of the World Bank) in Project Syndicate asserts that the laissez-faire approach to globalization has reached its (il)logical conclusion: “The failure of globalization to deliver on the promises of mainstream politicians has surely undermined trust and confidence in the ‘establishment.’ . . . Neoliberals have opposed welfare measures that would have protected the losers [of globalization]. But they can’t have it both ways: If globalization is to benefit most members of society, strong social-protection measures must be in place. The Scandinavians figured this out long ago; it was part of [their] social contract. . . . Neoliberals elsewhere have not – and now, in elections in the US and Europe, they are having their comeuppance.”  
 
  • Third: A series of insightful columns by Martin Sandbu in The Financial Times – tracing an “insurrection [that] has been a long time coming” – explores the links among economic stress and social-class anxiety that provoked this year’s social eruption: “Over the past generation, the trajectory of the white working class has no doubt changed the most for the worse, compared with the previous generation.”


The history-minded reflections of Jacques, Stiglitz and Sandbu underscore the fact that many economists are still pondering how so many of their policy prescriptions went so badly wrong, opening the way for the global financial crisis.

‘Smartest Places’ via smarter strategies: Sharpening competitiveness requires ingenuity, not inertia

Christopher Colford's picture

Seeking an antidote to the gloom-and-doom bombast of this election year? Try a dose of optimism about urban“hotspot hustle and cutting-edge cool” – with a book that champions smart public policy, delivered through a shrewd approach to Competitiveness Strategy.

Gazing into the rear-view mirror is a mighty reckless way to try to drive an economy forward. Yet backward-looking nostalgia for a supposedly safer economic past – with voters' anxiety being stoked by snide sloganeering about “taking back our sovereignty” and “making the country great again” – has infected the policy debate throughout this dispiriting election year, in many of the world’s advanced economies. Scapegoating globalization and inflaming fears of job losses and wage stagnation, populists have harangued all too many voters into a state of passivity, lamenting the loss of a long-ago era (if ever it actually existed) when inward-looking economies were, allegedly, insulated from global competition.


Optimism has been in short supply lately, but an energetic new book – co-authored by a prominent World Bank Group alumnus – offers a hopeful perspective on how imaginative economies can become pacesetters in the fast-forward Knowledge Economy. Advanced industries are thriving and productivity is strengthening, argue Antoine Van Agtmael and Fred Bakker, now that many once-declining manufacturing regions have reinvented their industries and reawakened their entrepreneurial energies.

Welcome to the brainbelt,” declares “The Smartest Places On Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation” (published by Public Affairs books). Now that brainpower has replaced muscle-power as the basis of prosperity in an ever-more-competitive global economy, the key factor for success is "the sharing of knowledge." Longlisted for the Financial Times/McKinsey Business Book of the Year Award, “Smartest Places” is receiving well-deserved attention among corporate leaders and financial strategists – and it ought to be required reading for every would-be policymaker.

The era of “making things smart” has replaced the era of “making things cheap” – meaning that industries no longer face a “race to the bottom” of competing on costs but a “race to the top” of competing on creativity. Knowledge-intensive industries, and the innovation ecosystems that generate them, create the “Smartest Places” that combine hotspot hustle and cutting-edge cool.





Those optimistic themes may sound unusual to election-year audiences in struggling regions, which are easy prey for demagogues manipulating populist fears. Yet those ideas are certainly familiar to readers at the World Bank Group, where teams working on innovation, entrepreneurship and competitiveness have long helped their clients shape innovation ecosystems through well-targeted policy interventions that strengthen growth and job creation.

“Smartest Places,” it strikes me, reads like an evidence-filled validation of the Bank Group’s recent research on “Competitive Cities for Jobs and Growth.” That report, published last year, offers policymakers (especially at the city and metropolitan levels) an array of practical and proven steps that can help jump-start job creation by spurring productivity growth.

Breaking down barriers to competition: Unlocking Africa’s potential through a regional platform for cooperation

Klaus Tilmes's picture



The cement industry in Africa is one of the sectors that would benefit from stronger competition policies, which can help strengthen the economy by preventing anti-competitive behavior and collusive price-fixing. 
Photo by Simon Davis / DFID — U.K. Department of International Development

What determines whether a country is able to reap the benefits of deepening regional integration and the related increases in trade, cross-border investment and economic opportunities from participating in global value chains? One of the key points in this timely discussion is ensuring that the gains from integration are not nullified by anticompetitive business practices or distortive government interventions. As economies become more interconnected, it will become ever more important to allow all businesses to compete on a level playing field. Some African economies, for example, have not benefited as expected, in part because of the continued existence of barriers to competition in domestic markets.

These concerns lie at the heart of a new publication developed by the World Bank Group in partnership with the African Competition Forum (ACF). The report explores competition issues that affect the performance of key markets in Africa, and it reviews the status of competition policy and its implementation across the continent. It is the first report to take a broad regional perspective on competition issues – and the first to be built on a partnership between the World Bank Group and a regional network of government agencies and ministries responsible for competition.

Among its findings, the report shows that reforms in input sectors, such as professional services, can boost the export competitiveness of downstream firms that use those inputs intensively. However, in many cases, trade is restricted when governments impose non-tariff barriers, including product standards or testing regimes that are more restrictive than necessary, which prevent the entry of new, lower-cost products. This is the case with fertilizer markets in both East and West Africa. Even when such non-tariff barriers are removed, it is important to prevent anti-competitive behavior, such as collusive price-fixing and market-allocation agreements among competitors – as was seen in the case of cement in South Africa, Namibia and Botswana.

The report also highlights that, in some sectors in Africa, the same firms operate in many countries and some firms may locate themselves in areas that allow them to supply markets across borders. These factors hold potential efficiencies – for example, where it leads to economies of scale – but it also makes it vital to view competition dynamics through a regional lens as well as a national one.

Banking consolidation in the GCC requires attention to competition

Pietro Calice's picture
Also available in: Arabic | French
National Bank of Abu Dhabi - Ijanderson977 (Own work) [Public domain], via Wikimedia Commons
National Bank of Abu Dhabi, UAE. Photo: Wikimedia Commons

Gulf banking markets may have entered an important phase of consolidation, with the potential to dramatically reshape both the role and the intermediation capacity of the industry. A few days ago, two large banks in the UAE, National Bank of Abu Dhabi and First Gulf Bank, agreed on a tie-up to create a national champion and regional powerhouse with $170 billion in total assets. In Oman, Bank Sohar and Bank Dhofar are in advanced merger talks. Bank mergers are expected to take place in Bahrain and Qatar as well.

The protracted downward trend in oil prices is threatening economic growth and fiscal sustainability in the region. This is having an impact on the banking systems. Banks are increasingly facing pressure on liquidity in the face of both private and public deposit outflows. This coupled with a low interest rate environment in the context of pegged currencies is eroding margins. Capital buffers are strong yet asset quality may deteriorate if oil prices remain low for a prolonged period and economic growth decelerates further. Therefore, in a context largely characterized by fragmented markets, consolidation may help achieve efficiency gains and ultimately preserve financial stability.

However, it is important that banking consolidation in the Gulf does not come at the detriment of competition. International experience shows that healthy bank competition generally promotes access to finance and improves the efficiency of financial intermediation, without necessarily eroding the stability of the banking system. Bank competition in the region is traditionally weak largely due to strict entry requirements, restrictions to bank activities, relatively weak credit information systems, and lack of competition from foreign banks and nonbank financial institutions. While increased market concentration does not necessarily imply greater market power, there is a risk that the current and prospective wave of industry consolidation may have long-lasting negative effects on competition if left unchecked.

Start talking, and let’s get to work: Dialogue and climate action in industries

Anja Robakowski's picture



Bangkok, Thailand — November 25, 2011: A flooded factory in the Nava Nakorn Industrial Estate at Pathumthani.
Photo @ photonewman



“No one can tackle climate change alone.” Those words, by Abdelouahed Fikrat, General Secretary of the Moroccan Ministry of Environment, aptly summarized the challenge that we face today in dealing with climate change. He made that declaration at the recent Dialogue for Climate Action event in Vienna, organized by The World Bank Group and the Government of Austria on May 24 and 25.

The Vienna event marked the launch of six Principles on Dialogue for Climate Action — a set of tenets aimed at guiding businesses and governments as they embark on productive conversations on how to cooperate effectively to fight climate change.
 
The World Bank Group and 12 international partners got together to collaboratively formulate the six principles: Inclusion, Urgency, Awareness, Efficiency, Transparency and Accountability.

In endorsing the principles and signing on to the Community of Practice (CoP) for Dialogue for Climate Action, Fikrat said, “The principles of dialogue launched at this event hold potential to contribute significantly to the COP 22 agenda and offer a tool to policymakers for engaging the private sector. We need to build on the current momentum to speed up the implementation of concrete actions.”
 
The tone for the event was set by Dimitris Tsitsiragos, Vice President of the International Finance Corporation (IFC), who stressed in his keynote address that “stopping the catastrophic impact of climate change requires urgent, comprehensive and ongoing public-private dialogue”.
 
Dialogue for Climate Action in Practice

So what does this mean in practice? How do we avoid pursuing a dialogue that is devoid of action? There is significant pressure on all actors to avoid “post-Paris blues” and stagnation. There is also a need to avoid actions in a vacuum, where everyone is doing something but without cohesion and coordination.

The six principles for climate action are based on the premise that all actors, working together, will create greater results. Bangladesh PaCT (Partnership for Cleaner Textiles), a project managed by the World Bank Group, makes a strong case for that approach. The project, which was launched in 2013, aims to introduce cleaner, more environment-friendly production methods in the textile sector, and dialogue is a key pillar of its project design. 

The changing face of entrepreneurship

Ganesh Rasagam's picture


Members of the World Bank Group’s Innovation & Entrepreneurship team – along with two of the entrepreneurs supported by the team (with their affiliations in parentheses) – at the Global Entrepreneurship Summit. From left to right: Temitayo Oluremi Akinyemi, Loren Garcia Nadres, Natasha Kapil, Kenia Mattis (ListenMi Caribbean), Ganesh Rasagam, Charity Wanjiku (Strauss Energy), Komal Mohindra, Ellen Olafsen.


What do you picture when you hear of new technologies and hot startups? Perhaps a trendy office space overlooking the Golden Gate Bridge and tech moguls from San Francisco? Well, think again.

At the recent Global Entrepreneurship Summit (GES) in Silicon Valley — an annual event hosted by President Barack Obama and attended by nearly 700 entrepreneurs — one message came across clearly: Great ideas come from anywhere. And, increasingly, they’re coming from talented entrepreneurs who are overcoming the odds in cities like Nairobi, Kenya or Kingston, Jamaica.

Increasing internet and mobile-phone access is bringing new opportunities to young entrepreneurs from developing countries. More than 40 percent of the world’s population now has access to the internet and, among the poorest 20 percent of households, nearly 7 out of 10 have a mobile phone.

Businesses that can take advantage of the widespread use of digital technologies are growing at double-digit rates — in Silicon Valley, as well as in emerging markets. Ground-breaking technologies and business ideas are flourishing across the world, and a new, more global generation of tech entrepreneurs is on the rise.
 
The potential impact — economic and social — is significant. Entrepreneurs have a powerful ability to create jobs, drive innovation and solve challenges, particularly in developing economies, where technology can address old inefficiencies in key sectors like energy, transport and education.
 
“[I]n our era, everybody here understands that new ideas can evolve anywhere, at any time. And they can have an impact anywhere,” said John Kerry, the U.S. Secretary of State. “In my travels as Secretary, I have been absolutely amazed by the groundbreaking designs I’ve seen, by the ideas being brought to life everywhere — sometimes where you least expect it.  By the men and women striking out to create new firms with an idea of both turning a profit as well as improving their communities.”
 
But for many of the brightest minds in developing countries, entrepreneurship is not an easy path.

As President Obama said during the Summit: “It turns out that starting your own business is not easy. You have to have access to capital. You have to meet the right people. You have to have mentors who can guide you as you get your idea off the ground. And that can be especially difficult for women and young people and minorities, and others who haven’t always had access to the same networks and opportunities.”


President Barack Obama on stage at the Global Entrepreneurship Summit with Mark Zuckerberg and entrepreneurs.
 

Taxing ‘public bads’ and investing in ‘public goods’: Constructive tax policies can help prevent harm and help promote progress

Christopher Colford's picture
To tax, or not to tax? That is the question that preoccupied a thought-provoking panel at a recent World Bank Group conference on “Winning the Tax Wars” – along with such pragmatic policy questions as: What products and behaviors should be taxed, aiming to discourage their use? How heavily should taxes be imposed to penalize socially destructive behaviors? If far-sighted, behavior-nudging taxes are indeed adopted, where should the resulting public revenue be spent?

Before memories start to fade about a stellar springtime conference – at which several of the Bank Group’s Global Practices (including those focusing on Governance and on Health, Nutrition and Population) assembled some of the world's foremost authorities on tax policy – it’s well worthwhile to recall the rigorous reasoning that emerged from one of the year’s most synapse-snapping scholarly symposia at the Bank.

Subtitled “Protecting Developing Countries from Global Tax Base Erosion,” the conference focused mainly on the international tax-avoidance scourge of Base Erosion and Profit-Shifting (BEPS). Coming just one week after a major conference in London of global leaders – an anti-corruption effort convened by Prime Minister David Cameron of the United Kingdom – the two-day forum in the Preston Auditorium built on the fair-taxation momentum generated by the recent Panama Papers disclosures. Those leaks about international tax-evasion strategies dominated the global policy debate this spring, when they exposed the rampant financial conniving and misconduct by high-net-worth individuals and multinational corporations seeking to avoid or evade paying their fair share of taxes.
 
The Bank Group conference, however, explored tax-policy issues that ranged far beyond the headline-grabbing disclosures about the scheming of rogue law firms and accounting firms, like the now-infamous Panama-based Mossack Fonseca and other outposts of the tax-dodging financial-industrial complex. Conference-goers also heard intriguing analyses about how society can levy taxes on “public ‘bads’ ” to promote investment in “public ‘goods’ ” – as part of the broader quest for broad-scale tax fairness.
 
"Winning The Tax Wars" via revenue-raising strategies

The false debate: choosing between promoting FDI and domestic investment

Cecile Fruman's picture

Should we focus our efforts on foreign investment or domestic investment?” Policymakers in developing economies often ask this question when the World Bank Group advises them on how to improve their countries’ investment climate or investment promotion efforts. Our answer is: They do not need to choose one over the other. In order to grow and diversify, an economy needs both domestic investment and foreign direct investment (FDI).  The two forms of private investments can be strong complements.
 
Recognizing the Potential Benefits of FDI
 
The economic benefits of FDI were identified a long time ago. A Harvard Business School paper published 30 years ago summarized the benefits of FDI based on an extensive review of economic literature (Wint, 1986). In short: Benefits traditionally attributed to FDI include job creation, transfer of technology and know-how (including modern managerial and business practices), access to international markets, and access to international financing.

Granted, some of these benefits also occur thanks to domestic investment. For instance, domestic investments create jobs in a host economy – usually many more than FDI. However: What FDI does well is enhance or maximize some of the benefits already generated by domestic investments in a developing economy.
 
To stay with the example of job creation: Foreign firms might not create as many jobs as the domestic private sector, but they often create better-paid jobs that require higher skills. That helps elevate the skills level in host economies. The same can be said for other FDI benefits. For instance, more advanced technologies and managerial or marketing practices can be introduced in a developing economy through foreign investment, and at a much faster rate than would be the case if only domestic investment were allowed. Moreover, through partnerships with foreign investors who have existing distribution channels and commercial arrangements around the world, developing countries’ firms can benefit from increased market access.



In China, millions of rural residents each year migrate to cities to seek work. As they find jobs in modernizing industries, they gain the skills they need to earn higher incomes. In this photo, an employe in Chongqing is learning higher-level computer skills. Photo: Li Wenyong / The World Bank
 

'Winning the Tax Wars': Mobilizing Public Revenue, Preventing Tax Evasion

Christopher Colford's picture
"Winning The Tax Wars" conference


"When something such as the Panama Papers [disclosures on global tax avoidance] happens, we seem to be surprised. We should not be."
— Vito Tanzi, former leader of international tax policy at the International Monetary Fund; author of "Taxation in an Integrating World" (1995)

"Taxes are what we pay for civilized society," said the famed U.S. Supreme Court Justice Oliver Wendell Holmes Jr. So what does it say about society when it tolerates a skewed tax system that applauds tax avoidance, accommodates tax evasion, mocks the compliance of honest taxpayers and drags its feet on tax cooperation?

Those are some of the philosophical (and pointedly political) questions that are being debated this week at the World Bank, at a conference that has gathered some of the world's foremost authorities on international tax policy along with international advocates of fair and effective taxation.

If you can't make it in-person to the Bank's Preston Auditorium this week, many of the conference sessions are being livestreamed and the video will be archived at live.worldbank.org/winning-the-tax-wars

The livestreamed sessions include a pivotal speech by a determined tax-policy watchdog, former Sen. Carl Levin (D-Michigan) — the former chairman of the U.S. Senate's Permanent Subcommittee on Investigations — whose address on "Reducing Secrecy and Improving Tax Transparency" will be one of the highlights of the forum.

Coming just a week after a global conference in London on tax havens, tax shelters and abusive tax-dodging — a conference that highlighted some wealthy nations' lackadaisical approach to enforcing tax fairness —  this week's Bank conference, "Winning the Tax Wars: Protecting Developing Countries from Global Tax Base Erosion" will propel the fair-taxation momentum generated by the recent Panama Papers disclosures. That leaked data exposed the rampant financial engineering (by high-net-worth individuals and multinational corporations) to avoid or evade taxes.

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