Batting for competition
Densil Williams, Contributor
Recent developments in the telecommunications and energy sectors of the Jamaican economy have brought to the fore the age-old debate on competition vs industrial policy as tools for economic development and improved competitiveness. The Digicel-Claro merger, and the court ruling on the legality of the Jamaica Public Service Company being the monopoly distributor of electricity in the energy sector, are just a few of the items that have elicited strong sentiments on the role of competition in driving economic growth and competitiveness. While most of the arguments are not very nuanced, in essence what they narrow down to is whether competition or state protection is the best model for driving economic growth.
It is still not clear where our policymakers fall on this continuum, as there seem to be mixed signals in relation to competition versus protection/government intervention in stimulating activities in industry. One thing should be clear, however: The noise about state protection of industries in Jamaica should only be that - noise and nothing else. State protection in a small market like Jamaica's is not only wrong but dangerous.
A plethora of empirical data have shown the strong connection between competition and productivity growth which, by extension, leads to stronger economic growth and increases a country's resilience to economic shocks. This, in fact, is even more relevant to small, open economies like Jamaica's that are generally vulnerable to shocks from natural disaster and the cyclical nature of trade in commodities, i.e., terms of trade shocks.
There is no doubt that vigorous competition policies must be enforced in Jamaica in order to stimulate stronger growth in its macroeconomy and to ensure that industries perform efficiently and deliver meaningful benefits to the country.
INDUSTRIAL POLICY VS COMPETITION
There is an argument being proffered in Jamaica in order to support government intervention in market. It goes like this: Because the Jamaican market is small, it is not worthwhile to infuse competition in major industries such as energy distribution, since the market does not have the capacity to accommodate more than one player. On the surface, this argument seems convincing.
However, with deeper analysis, it is revealed to be a throwback to the days of industrial policy driving economic growth. The argument narrows down to the government directing which specific activities to stimulate in order to grow the economy. This, in essence, is exactly what industrial policy is about. It is the government's blueprint as to which sector of the economy it must influence in order to drive economic growth and development.
Based on the government's choice of sector, it will then allocate limited resources to these sectors and hope that they can grow sufficiently to stimulate the rest of the macroeconomy and lead to overall strong economic growth. So, the government is the arbiter on which economic activities prosper or die. The chance of the government selecting the correct sectors to support is very slim, as the empirical evidence has shown.
Competition policy, driven by the market, is a better arbiter than the government. When market forces are allowed to work, they will lead to a level playing field where the most efficient enterprises prosper and the least efficient ones are driven out of the industry. In a market where there is open and fair competition, the economy will perform much better. Competition will lead to higher levels of efficiency, new and more efficient enterprises will enter the market, and inefficient firms will crash out. In this case, the government's limited resources will be spent on the most efficient economic activities and deliver higher value to consumers.
Jamaican consumers do not have to look far to see the strong benefits from competition. The liberalisation of the telecommunications sector, more than a decade ago, resulted in the entry of many new players in the sector, reduction in prices, and, in some cases, higher-value service. It also led to more variety for consumers.
The benefits derived from the strong competition in the telecommunications sector can be replicated in other industries. This will undoubtedly be good for economic growth and for consumers.
I am aware of the biggest rebuttal to the call for competition in an economy like ours. The protagonists of state protection will argue that size matters, and as such, a small economy like Jamaica's cannot afford to have too much competition in its industries. While the point that context matters can be appreciated, it is not at variance with the core argument that competition policy is better than industrial policy in driving economic growth and productivity over time. The market should be the arbiter as to which firms remain in an industry and which ones are driven out, not individual policymakers.
In a small economy, if the market forces work well, once competition is alive, the market will drive out the inefficient firms and leave stronger, more efficient ones that can fuel productivity and economic growth over the long run. Policymakers should not be the ones who determine this. The role of the policymakers is to set the correct framework so that competition can thrive and the market forces work properly.
In this regard, there should be strong competition laws, which can prevent dominant market players from abusing their power, monitor mergers and acquisitions that reduce competition, and prevent agreements that restrict competition. This is where policymakers should be directing their efforts, not at trying to pick winners. Picking winners is a bad strategy for improved economic growth. Ensuring competition is a better strategy.
As the Jamaican economy grapples with low growth and poor performance since its Independence, it has to find new ways to improve those indicators in the next 50 years. An important pillar that will have to be enhanced is that of competition. Indeed, the Global Competitiveness Report of 2012-213 argues that lack of competition among Latin American and Caribbean economies is one of the major threats to the improved productivity in the region. The report noted that:
"Over the past year, although several countries have once again made good progress in raising competitiveness, the region as a whole continued to face important competitiveness challenges. These pertain in particular to a weak institutional set-up with high insecurity, poor infrastructure, inefficient allocation of production resources caused by insufficient levels of competition, and a low capacity to generate new knowledge to strengthen R&D innovation in the region."
The temptation for government intervention in markets through subsidies, imposition of barriers to entry, and other market-distorting mechanisms - in the name of saving jobs - is appealing. However, in the long run, this will prove to be bad policy, protecting inefficient enterprises and hurting consumer welfare.
Jamaica does not have the fiscal space to absorb bad economic policy choices, so it is important that market forces be allowed to work and allocate resources to the best-valued activities rather than policymakers picking winners. Strengthening the Fair Trading Commission through the competent persons skilled in economics, and legal and regulatory issues will be important in preventing the market from behaving in an unbridled manner. This is where policymakers should focus their attention.