Russia: Doing Business in Russia - Competition Policy and Growth

November 26, 2010

Economic development is the result of the interaction of two main factors -- availability of inputs and a country’s incentive/Institutional regime. Competition is one of the factors affecting the incentive regime for cost reduction, quality improvement, innovation and thus productivity gains. It can thus lead to more productive and nimble firms that can in turn contribute to higher growth, entrepreneurship development and diversification.

Business in Russia

The World Bank is working with the Ministry of Economic Development in assessing key obstacles to competition in the Russian Federation both at the federal and subnational levels.

The Doing Business Project provides objective measures of business regulations and their enforcement across 183 economies and selected cities at the subnational and regional level.

First results

Doing Business in Russia 2009: New Report Finds Adopting Good Practices Can Enhance Business Environment across Russia

Potential gains that can be realized through the introduction of a well designed competition framework also include greater consumer welfare and economic efficiency in form of lower prices, greater choice and variety of goods and services, innovation, reduced costs and better allocation of resources.

Empirical evidence shows strong correlation between higher GDP per capita and local markets where competition is more intense in most industries. Similarly, higher frequency of entry of new competitors into a local market is also associated with higher GDP per capita and, to some extent, with higher growth rates. Measures of mark-ups also indicate that low domestic competition translates into lower international price-competitiveness.

Many countries have successfully improved their competition policies (EU, Australia, Canada, etc.). From a historical prospective, the EU example illustrates how following the adoption of the Treaty of Rome in 1957 and an active competition policy (notably through strict regulation of state aid to minimize distortions to competition), the integration of small national markets into a large single market promoted trade, and how these “trade clubs” helped Europe converge to U.S. productivity levels within the span of two decades. Similarly, recognizing the importance of nationwide competition as a driver of enhanced productivity and living standards, in Australia, representatives of federal, state and local governments agreed in 1992 to the development of a National Competition Policy (NCP). The NCP in Australia established a formal institutional setting for cooperation on the competition reform agenda based on a broad-based consensus and introduced a system of “competition payments” defined as the state’s share of additional revenue arising from the NCP -- with payments made from federal to state governments that implemented specific reforms and pecuniary penalties imposed on slow reformers. The Australian experience is considered to be one of the most successful examples in recent years. The NCP helped reduce barriers to entry and exit and improved competition; It is estimated to have increased GDP by 2.5% (excluding dynamic effects).

Competition can be measured in different ways:

The economy-wide OECD Product Market Regulation (PMR) indicators are used to measure the extent to which policy settings promote or restrict competition in areas of the product market where competition is viable. The indicators cover formal regulations in the following areas:

  1. state control of business enterprises;
  2. legal and administrative barriers to entrepreneurship;
  3. barriers to international trade and investment.

An anti-competitive PMR lowers productivity by slowing technological diffusion across countries, curbing ICT investment, reducing FDI and foreign affiliate penetration, restricting firm entry, and restricting formal-sector employment.

The World Bank Group Doing Business (DB) report assesses the regulatory environment faced by a domestic small to medium-size firm - from start-up and operations to closing a business - through 11 indicators.

Russia ranks poorly on both measurements. According to the PMR methodology, Russia has one of the most restrictive markets in OECD (particularly on state regulation). According to the DB methodology, Russia (assessed through Moscow) ranks particularly poorly on the Starting a business, Dealing with construction permits, Trading across borders and Closing a business indicators.

At the same time, when looking at the regional level, the picture appears more nuanced as revealed by the first round of Subnational Doing Business conducted in 2009 in 10 cities, which shows significant regional variations. For example, while Moscow stands out as the worst performer in the construction permitting area, Rostov-on-Don is doing significantly better and - when compared with the global ranking - is at par with Portugal on the ease of building a warehouse.

This shows that there is a broad unfinished business environment reform agenda to ease new firm creation and exit of inefficient incumbents (as again highlighted by the recent Doing Business report 2011), but also that an important part of the reform agenda is in the hands of the regions.

Thus, as part of its broader collaboration in the area of export diversification, the Bank will be working with the Ministry of Economy to assess key obstacles to competition in the Russian Federation both at the federal and regional levels by:

  1. Conducting a review of the anti-competitive effect of key regulations and policies in the Russian Federation;
  2. Carrying out selected sector studies;
  3. Contributing to further critical data generation on sector mark-ups as well as comparative regional performance data that can help better capture regional variations - through regional PMR and the second planned round of Subnational Doing Business in 30 regions that will be conducted in partnership with the Ministry of Economy.