Improving competition systems can help overcome persistent obstacles, says World Bank report
WASHINGTON, April 10, 2024 – Latin America and the Caribbean (LAC) has reached a critical juncture. While the region has made significant progress in economic stabilization over recent decades, growth has stalled, undermining progress. Urgent action is needed to reverse course. In a new report, “Competition: The Missing Ingredient for Growth?” the World Bank highlights potential areas for action, emphasizing that leveraging competition policies and institutions is key to any impactful growth strategy.
The World Bank forecasts that regional GDP will expand by 1.6 percent in 2024. GDP growth of 2.7 and 2.6 are expected for 2025 and 2026. These rates are the lowest compared to all other regions in the world, and insufficient to drive prosperity. With social transfers declining and wages not yet rebounding to pre-pandemic figures, many households are under pressure.
"Persistent low growth is not just an economic statistic, it's a barrier for development. It translates into reduced public services, fewer job opportunities, depressed salaries and higher poverty and inequality. When economies stagnate, the potential of its people is constrained. We must act decisively to help Latin America and the Caribbean break away from this cycle," said Carlos Felipe Jaramillo, World Bank Vice President for Latin America and the Caribbean.
Factors driving these growth numbers include low levels of investment and domestic consumption, elevated interest rates and high fiscal deficits, declining commodity prices, and uncertainty in the prospects of important partners such as the U.S., China, Europe and other G7 countries. An adverse global scenario, marked by geopolitical tensions, disruptions of shipments through the Suez Canal, and the El Niño phenomenon could further dampen prospects.
A bright spot in the region has been inflation management, reflecting decades of solid macroeconomic reforms. Regional inflation, excluding Argentina and Venezuela, stands at 3.5%, compared to 5.7% in the OECD (Organisation for Economic Co-operation and Development) countries. In most of the region, inflationary expectations remain anchored and central bank targets are expected to be achieved in 2024. To capitalize on this progress and reignite economies, LAC must address longstanding challenges. Reforms in infrastructure, education, and trade are critical to enhance its productivity and global integration.
“As the pandemic shock recedes, LAC’s growth rates mirror the ones of the 2010s. This shows that the region has not addressed persistent obstacles that block its potential, including low education levels, poor infrastructure, and high investment costs, which also fuel social discontent,” said William Maloney, World Bank Chief Economist for Latin America and the Caribbean. “An agenda that drives growth forward is one that addresses these gaps seriously. Otherwise, the region will remain stuck and won’t be able to attract investments or seize new opportunities, such as nearshoring or the low-carbon economy. Improving competition systems should be part of these strategies, leading to improvements for consumers and businesses.”
Better competition policies as a driver of growth
Fostering competition is central to revive the economy and win back investor confidence. When competition is underpinned by sound policies, institutions and frameworks, companies innovate, become more efficient and provide technological breakthroughs. Consumers are better off thanks to lowered prices an.d more choices. In LAC, this is a pressing matter. The region has low competition levels, undermining innovation and productivity. Consumers are also penalized, facing higher markups than the rest of the world.
The report discusses the reasons behind this scenario. The business landscape in LAC is concentrated, marked by a stark contrast between a few large firms dominating markets and numerous small businesses. 70% of workers are self-employed or work in businesses with less than 10 employees, engaging, for the most part, in low-productivity activities.
Furthermore, despite the presence of competition agencies and laws in many LAC countries, enforcement is fragile, as many agencies lack funds or are understaffed. Powerful businesses often influence government policies, hindering the effectiveness of competition laws.
All this creates a cycle where a handful of large companies dominate and influence markets, and businesses have little encouragement to innovate. With low incentives to excel, idle companies remain in business and end up ill prepared to compete, stifling their potential to drive growth.
As countries explore new plans to rekindle growth, they must avoid the temptation to limit competition, which could perpetuate the current cycle of low productivity and low growth. To improve competition frameworks in the region and advance LAC's position in the global market, the report suggests key areas for action, including:
- Strengthening competition agencies. The report pioneers evidence that effective domestic competition agencies have a positive impact on productivity, sales, and wages. Bolstering these agencies includes ensuring their independence and enforcing their ability to implement antitrust and pro-competition regulations, especially for bigger businesses. This also involves promoting solid public management practices and training officials.
- Supporting innovation policies. Competition per se is not enough to make companies thrive. Businesses need to be prepared for increased competition, both domestic and international. This requires complementary policies that stimulate companies to innovate and move them up the technological ladder, so they are able to compete, adopt new techniques, and grow.
- Boosting managerial skills. Upgrading managerial knowledge will help companies respond to markets, identify new opportunities, develop business plans, and stimulate workers. This should happen alongside an agenda to improve education at every level, preparing students and the workforce to thrive in competitive environments.
Access the report here.
Website: www.worldbank.org/lac
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