Competition as a driver of innovation and productivity

Competition in goods and services markets is a determinant of aggregate productivity by influencing both the allocative efficiency of the economy and the internal efficiency of firms. Lack of competition leads to an inefficient allocation of production factors. First, barriers to competition allow low productive firms to survive and even prosper, while the more productive ones do not necessarily develop their full potential.

Second, in industries where the entry of new firms is restricted, the role of the selection process in firm dynamics is distorted, reducing the possibility for new, higher productivity firms to replace outgoing, less productive ones, which would not be able to survive in a more competitive environment.

On the other hand, the lack of competition also affects companies’ productivity directly. Facing less competitive pressure, companies have less incentive to innovate and improve their processes and management practices. Likewise, high market power can lead to more restrictive labor practices, which tend to reduce workers’ efficiency and effort (Álvarez et al., 2018). 

RED 2018 (Álvarez et al., 2018) shows that LAC has low levels of competition, especially in the services sector, which translates into high price margins compared to other regions and, in particular, to higher-income countries. In a recent World Bank report, Maloney et al. (2024) find that markets in LAC are characterized by a high level of concentration and market power, with the presence of a few dominant giant firms.

Figure 2.17 confirms these findings. It shows an index of the degree of market dominance where it can be seen that, according to the opinion of business executives in each of the countries, the levels of competition in LAC countries are below those observed in OECD members.

It is healthy to protect competition

Although in the last 20 years there has been significant progress with «the enactment of numerous new competition laws, amendments to existing ones and the establishment of a significant number of competition authorities”¹, the region continues to show a lag in this area with respect to more developed countries. Although some countries have adopted competition policies aligned with good practices, deficiencies persist in the implementation and enforcement of laws, as well as in the institutional capacity to promote a more competitive environment (Álvarez et al., 2018). 

Also, competition policies are still young and weak in many countries in the region, thanks in part to the power and influence wielded by large companies. In general, competition agencies are understaffed and underfunded compared to their peers in OECD countries. This is reflected in fewer ex officio investigations for anticompetitive behavior (Maloney et al., 2024; OECD, 2022).

In order to strengthen the regulatory frameworks for competition defense and the corresponding agencies, it is necessary to implement a set of measures to address the deficiencies identified. These measures should focus, first and foremost, on improving institutional capacities. This implies providing the agencies with greater autonomy and resources so that they can effectively investigate and sanction anticompetitive behavior. This includes improving information collection and analysis systems, as well as staff training.

On the other hand, enforcement and compliance must be improved. This involves ensuring that competition laws are applied impartially and efficiently, with dissuasive sanctions for companies that break the rules. It is also crucial to promote awareness of the importance of competition and make it easier for consumers to report anti-competitive practices.

Trade openness

Another policy highlighted by RED (Álvarez et al., 2018) ) to promote competition is trade openness. The report shows that «despite the progress that Latin America has undoubtedly shown in recent decades in terms of trade openness, the region remains relatively closed to international competition compared to more developed countries». As figure 2.18 shows, LAC has high tariffs compared to other regions. For example, it has an average effective tariff rate of almost 7 %, while more developed countries have tariffs around 3 % or even lower, as is the case of the European Union. Furthermore, LAC has tariffs similar to those of other developing economies and much lower than those observed in lower-income countries and regions.

Within the region, however, there is great heterogeneity. On the one hand, there is Peru and a group of Central American countries such as Honduras, Costa Rica, Nicaragua and El Salvador with low tariffs, at levels similar to those observed in more developed countries. On the other hand, there is a group of countries with very high tariff barriers, such as those of Mercosur and some Caribbean countries.

Also, as mentioned in the RED (Sanguinetti et al., 2021), existing non-tariff barriers in the region «can represent important restrictions to trade and in several cases be comparable in magnitude or even higher than tariff barriers». RED (Álvarez et al., 2018) suggests that these barriers have been used as a proxy for tariffs in the design of trade policy in the region in a context of continuously falling tariffs since the 1990s.

The barriers to trade in LAC are reflected in the relatively low volume of international trade relative to the size of the economy. Figure 2.19 shows that total trade in the region represents about 50 % of GDP, below most other regions of the world and the more developed countries, including the European Union, where this indicator reaches 94 %. Even the least developed countries, most of which are in Sub-Saharan Africa, have higher levels of trade.

Again, there is great variability within the region. In particular, small economies such as those of the Caribbean and Central America have levels of trade openness that tend to be higher, as is to be expected in this type of economy, while the larger ones, such as Argentina, Brazil and Colombia, have significantly lower levels of trade. The case of Mexico is exceptional in this regard because of its relationship with the United States, to which it directs around 80 % of its exports and from which almost half of its imports come.

These low levels of trade openness in the region translate, in turn, into low regional integration. Countries not only trade relatively little with the rest of the world, but also among themselves. As shown in panel A of Figure 2.20, LAC is one of the regions with the lowest intra-regional share of its imports and exports, both representing around 15 % of the total. In the case of exports, LAC is only above South Asia², whose intra-regional exports account for only 7 % of the total, and practically at the same level as the Middle East and North Africa. Overall, LAC is far behind the intra-regional trade values of Europe and Central Asia, and East Asia and the Pacific. 

The lack of regional integration is also apparent in the level of tariffs applied to intra-regional imports. Panel B shows that effective tariffs on intra-regional imports are not only higher than total effective tariffs in LAC, but are also the second highest among the regions included there.

The issue of international trade, of the development of the tradable sector, not only of exports that find quality niches in the world but also of efficient import substitutions, is a very important process. I am convinced that in this sense, structure is important for growth. There are some economists who think that the only important thing is to be productive in whatever one produces, but I tend to think that it is not only to be productive and efficient but also to tend to produce more, to be oriented towards external demand, towards the tradable sector. This structure seems to me to offer a wider range to grow based on learning, development and technological adoption.

Based on an interview with Augusto de la Torre

International trade is an important ally of improved productive capacity, and it is so through at least two channels that the literature has shown to be manifested in Latin America and has shown this to be the case in the various episodes of trade liberalization. A first element is competitive pressure.

Based on an interview with Marcela Eslava

To promote greater trade openness, the countries of the region must first reduce or remove tariff and non-tariff barriers. Countries with high tariffs, such as those of Mercosur, should consider a gradual reduction until they reach levels similar to those of countries with lower import levies. Secondly, improvements in logistics systems and the simplification of customs processes and procedures are needed to avoid greater trade restrictions and costs. Finally, it is necessary to promote regional integration, for which it is also essential to improve transportation infrastructure, especially land transportation³.