Latin America could have 11% higher GDP per capita and reduce inequality by 6% if it had more competitive markets, says IDB

According to the survey, market concentration in Latin America and the Caribbean is four times greater than in advanced economies. In an email conversation with the blog, Brazilian Cezar Santos, senior economist at the IDB Research Department and co-editor of the study, explains that one consequence of this concentration is that, for the same level of business costs, prices in the region tend to be around 15 percentage points higher: profit margins in Latin America and the Caribbean are, on average, 35% higher than costs, while in competitive markets they are around 20%.

In contrast, workers return only 50% of the value they generate, compared to 65% in the United States and 81% in other advanced economies.

— In noncompetitive markets, businesses influence the prices of the goods and services they sell as well as the inputs they use, such as labor. Dominant companies tend to sell at high prices and hire fewer workers, paying lower wages. This leads to a decline in total output (GDP) and greater inequality, Santos says.

— For a region suffering from low growth, more competition must be part of the treatment. This can bring many benefits: more production, less inequality, lower prices for consumers and higher wages for workers.

According to the economist, without competitive pressure, companies have less incentive to invest in Research & Development (R&D). The study shows that on average, companies in the region only invest a quarter of what European companies invest in R&D. This reduces productivity in the long term. With less production, companies hire fewer workers and, in general, pay lower wages.

— In Brazil, the markup (price-cost ratio) is slightly lower than the ALC average, which indicates a level of competition slightly higher than the regional norm. When it comes to R&D, the country also tends to invest more than the region’s average, he says.

The IDB’s portrait of the region shows that 95% of businesses in Latin America and the Caribbean have fewer than five employees and represent 57% of employment. The most productive companies, those with more than 50 employees, represent only 1% of the total number of companies and 20% of jobs.

— The countries of the region, despite a certain heterogeneity, generally present high levels of informality. Informal businesses tend to be smaller and have little market share. And even among formal businesses, the literature has already shown that developing countries have more small businesses. There is a lack of mid-sized companies, the so-called “missing middle”. They are the ones who could compete with already established companies, but this remains rare in the region, Santos emphasizes.

The study outlines three priorities for increasing competitiveness in Latin American and Caribbean markets. The first is to take into account that markets are small and fragmented, making it easier for a few companies to concentrate large market shares. To achieve this, it is necessary to connect these markets through greater technological interoperability, better physical infrastructure and greater regional integration.

— With more integrated markets, they become larger and have more competitors. Faced with increased competitive pressure, companies tend to invest more in innovation in an attempt to “escape” competition. This increases productivity in the long term. The study shows an increase in the knowledge stock of countries a few years after greater integration, with larger research teams, greater impact of work and more patents — explains the economist.

The second priority is to make regulation smarter. The study shows that in the region, government regulation tends to create barriers to the entry of new businesses and the growth of existing businesses, thereby harming competition. The recommendation is to eliminate rules that keep businesses small and adopt evidence-based policies that correct market failures without hindering growth.

— Many regulations are important to remedy market failures or to implement redistribution policies. But it is essential to weigh these benefits against the cost that excessive regulation can impose on competition – he emphasizes.

The third priority is to strengthen antitrust agencies, increasing the budget, technical team and independence to combat anticompetitive practices.

— The problem with low competition is that businesses are uncompetitive. This can happen due to the formation of cartels, mergers and acquisitions that increase concentration too much, among other practices. The institutions responsible for combating this behavior are the antitrust agencies. The study shows that these policies can lead to lower prices for consumers. The Brazilian authority was listed as a regional example, with a relatively high budget and staff, but there is still some way to go: agencies in the region tend to have fewer resources and staff than those in OECD countries, Santos says.

Launched this Thursday at IDB headquarters in Washington, the report is part of the Development in the Americas (DIA) series. Drawing on new evidence – including a new database containing comparable indicators of competition across countries and sectors – the study shows how well-designed policies can generate concrete gains for consumers, workers and sectors such as telecommunications, banking and healthcare. For Laura Alfaro, chief economist and economic advisor at the IDB, the goal is to equip policymakers and researchers with data to help them design smarter policies that can spur innovation, fair wages and sustainable growth.

The report also provides examples of policies that have increased competition in the region. In the telecommunications sector, number portability has reduced switching costs for consumers, thereby facilitating competition between operators. In the banking sector, Brazil and other countries have implemented, in addition to credit portability, digital payment systems, such as Pix, which enhance interoperability and competition. The study also highlights that rules that increase competition in public procurement generate concrete benefits.

— One example is Mexico, where changes to public purchasing rules allowed insulin to be purchased at lower prices, leading to larger purchases and better health indicators. The aim of the study is to show that increasing competition in the economy as a whole – and there is still a way to go in the region – brings tangible benefits to the population, Santos emphasizes.

For Ilan Goldfajn, President of the IDB Group, the report demonstrates that markets are not only a backdrop for development, but an active instrument to promote it.