Competition, productivity and industrial growth
October 19, 2001
*Syed Akhtar Mahmood is with the Private Sector Advisory Services Group of the
World Bank. The views expressed here are his own and does not necessarily
reflect the views of the World Bank Group.
In his first public statement after assuming office, the new commerce
minister Mr. Amir Khasru Mahmud Chowdhury has pointed his finger at something
very important, i.e. the need to raise productivity. The October 15 issue of the
Independent quotes him as saying "If we cannot cut down the cost of
production, we’ll not be able to stay in the global market…; we should
reduce the cost of production of not only exportable goods but also of the
products meant for local consumption". The minister has got it exactly
right.
This emphasis on productivity and cost reduction is a refreshing departure
from the frequent talk we hear about providing special favors to industry. We
often see private sector representatives, struggling to remain competitive,
asking for duty-free access to world markets, reduced tariffs on imported
inputs, lower taxes on corporate income, and easier access to bank financing.
While all these may help, at the end of the day the key to industrial growth is
productivity. And yet, compared to the repeated talk we hear about special
favors for industry, there is little discussion, at least in public fora, on the
need to enhance productivity and to identify and remove barriers to productivity
improvements. Mr. Chowdhury’s emphasis on productivity enhancements is thus
very refreshing, all the more so because he comes from the private sector.
Any comparative study of Bangladeshi industry will show that most of our
firms operate at productivity levels far below global best practice levels. Part
of this could be explained by technology differences. However, even where we use
the same technology, we usually operate it with much lower productivity than the
most productive firms in the world. There are wide variations within Bangladesh
too, with productivity levels varying significantly from firm to firm in the
same industry. An important challenge for us is thus to catch up with
international best practice.
Indeed, catching up with best practice is the essence of development.
Cross-country experience tells us that one of the key ingredients of development
is the ability to adopt and adapt good practices, be they in technology,
production processes, organizational methods or institutional arrangements.
Adoption of better practices is needed to improve productivity. And productivity
is key to growth.
Catching up with international best practices is thus one of the critical
challenges for Bangladesh. Many of the best practices will be found in the
developed world but some will be found in the developing countries too,
including in our own backyard. Micro-finance is a case in point where Bangladesh
is recognized the world over as the home of good practices. The question is not
where the good practices reside; it is how we adopt and adapt these in our own
country.
If we want to see our industries adopt and adapt good practices, we need to
create an investment climate that both generates the incentives to do so as well
as enables the economic actors to carry out the necessary actions. An investment
climate that rewards entrepreneurship and opens doors for it is critical for
rapid growth. The dimensions of a good investment climate include
macroeconomic-stability, open and competitive markets, strong property rights,
rule of law and good governance, and an adequate supply of infrastructural and
financial services.
International experience suggests that open and competitive markets are the
key to the adoption and diffusion of best practices. Open economies give people
access to new ideas, products, techniques and ways of doing things. Competitive
markets generate the incentives to adopt these good practices. Although
Bangladesh has opened up its economy considerably in recent years, there are
still many barriers to entry for both foreign and domestic investment. Sometimes
there are outright restrictions against entry. For example, till recently,
private entry into power generation or telecoms services was not allowed in
Bangladesh. Sometimes, there are no outright bans but all kinds of bottlenecks
that effectively prevent private sector provision. If Bangladesh is to enhance
productivity, it needs to fully exploit the potential of the private sector. It
is important to note that the mere opening up of a sector to private enterprise
is not enough. It is crucial to have a competitive private sector. One does not
want to replace state monopolies with private monopolies.
When barriers exist, the benefits usually accrue to the comparatively large
incumbent firms that are politically well-connected. Endowed with market power,
these firms tend to dominate, undermining competition and reducing productivity
growth. Endowed with political connections, they can protect themselves against
failure when they do not perform, often via preferential access to bank credit.
This generates a vicious circle: as entrepreneurial opportunities are reduced,
prospective enterprises find it difficult to enter the arena and existing,
dynamic firms might it difficult to innovate and out-compete the less productive
but well-protected enterprises.
Competition is thus critical for productivity growth. But there are other
important factors as well. An important dimension of a good investment climate
is a sensible governance system that allows contracts and property rights to be
respected and corruption to be reduced. Equally important is an infrastructure
that allows private entrepreneurs and their employees to operate effectively. In
addition to competition, regulation is needed to channel private initiative in
socially useful directions.
A sound financial sector is important too. This is required to allow firms to
enter the market and operate effectively as well as to help restructure failing
firms. An important task of the financial sector is to support entry of
promising firms and reallocate resources away from failing or under-performing
firms to more promising ones. A well-functioning financial sector operating at
arms-length from political and corporate interests is crucial for competition
and productivity growth.
In addition to improving the overall investment climate, governments often
try to support private firms directly in order to help them overcome market
failures. Such support typically includes the provision of finance and business
development services to private firms. One needs to exercise caution before
pushing for such schemes. Cross-country evidence tells us that public support to
private firms that were based on subsidized credit or provision of business
development services without aligning them with market demand and supply, have
typically had poor results. Support to private firms in an inadequate investment
environment usually leads to waste. If support to private firms is to succeed
and lead to productivity improvements, it needs to be free of market-distorting
subsidies and supportive of market forces.
The above discussion of investment climate points to
the importance of an effective state. All levels of government, including
central, state and local, have an important role to play in creating the setting
for markets and entrepreneurship to flourish. However, this does imply an
over-intrusive government. On the contrary, instead of having a finger in every
pie, the government should focus attention on its core tasks, such as
establishing the rule of law and the right policy and regulatory framework, and
ensuring good governance. This focus is necessary if the government is to help
create a competitive environment for the private sector. In such an environment,
consumers would have choice and entrepreneurial energies would be spent in
catching up with global best practices, not in catching up with ministers in a
quest for licenses and permits.
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