it's the competition

Filed in archive Global Economy on April 19, 2004

to kick start developing economies argues a new and very interesting research from McKinsey. The main line of arguments says that productivity enforced by strong competition is much better then any other macroeconomic influence to bring a country forward.

We had this argument on this weblog before that entrepreneurship and the following increased competition are a key to let any economy (but especially poorer ones) thrive. But McKinsey surely has better data:

"At the McKinsey Global Institute (MGI) we have had, since 1990, the luxury of studying the dynamics and evolution of a representative group of industries in 13 countries: Australia, Brazil, France, Germany, India, Japan, the Netherlands, Poland, Russia, South Korea, Sweden, the United Kingdom, and the United States. In each, we analyzed the performance of 6 to 13 industries and compared it with the performance of the same industries in a handful of other countries. Our work is thus based on detailed studies of individual businesses, from state-of-the-art auto plants to black-market street vendors. It builds an understanding of the economy from the ground up, not the top down---a grassroots rather than a bird's-eye view."



Source: McKinsey



"Poor countries thus don't have to wait until they build bigger and better school systems and educate a whole generation of workers. Nor do they need to wait for more development aid from rich countries. If local businesses followed the proven approaches for organizing production and managing a workforce, poor countries could grow much faster than most people realize. Domestic savers and foreign investors hungry for good returns would also supply these countries with plenty of capital for new investments."

"The Washington consensus of the 1990s profoundly underestimated the importance of a level playing field for competition. Over and over again, MGI found industries in which more productive innovators were excluded and less productive companies favored. In much of Europe, for instance, zoning laws prevent large retailers from expanding as fast as they could and therefore from replacing less efficient small retailers. Because retailing is one of the largest sectors in most economies, it has important ramifications for a nation's standard of living. For instance, Tesco, the United Kingdom's largest food retailer, has failed to obtain planning permission to build a modern supermarket on the site of a derelict hospital---broken windows and all---near central London because the building is over 100 years old. The result of such failures is lower productivity for the UK economy and higher food prices for consumers."

"In Japan, a combination of zoning laws, tax policies, and government subsidies has allowed the smallest, most inefficient retailers to thrive. Today they account for slightly over half of all retailing employment, compared with less than 20 percent in the United States. In one small shop in central Tokyo, I have seen the same hat sit unsold on a store shelf gathering dust for the past 15 years. Every time I'm in Tokyo, I check to see if the hat is still there. It is. The proprietors don't have to sell it to stay in business, since they get subsidized loans. Their shop sits on some of the world's most valuable land, so they know their estate will repay the loans."

"For one thing, most people favor the social objectives that inspire high minimum wages, small-business subsidies, and other business policies. They may not be aware of the unintended adverse consequences that create major barriers to growth. Instead of attempting to achieve social objectives by limiting competition, countries should allow fair competition and thereby generate more national income, which can then be redistributed through taxes and government subsidies for the desperately poor."

A good example for reports arguments is anecdotal evidence from India's outsourcing industry (although quoted different in the report). Luckily free from much legal barriers it was created without major capital infusion and was overcoming India's poor public infrastructure. Indian outsourcing companies have in my ways created to actual boom of outsourcing of services.