Speeches & Transcripts

Remarks by Klaus Tilmes, World Bank Group Trade & Competitiveness Global Practice Director, at the OECD Global Competition Forum, Paris, France

October 29, 2015

Klaus Tilmes, World Bank Group Trade & Competitiveness Global Practice Director OECD Global Competition Forum Paris, France

As Prepared for Delivery

Good morning. Let me begin by thanking the OECD for inviting the World Bank Group to take part in this very valuable discussion.

Our dialogue here today should underscore the importance of robust and competitive markets in advancing broadly shared prosperity by creating meaningful employment, rising incomes and resilient economies.

Those are key priorities from the perspective of the World Bank Group, as we pursue our two goals: eliminating extreme poverty by the year 2030, and building what we call “shared prosperity” –focusing especially on the needs of the bottom 40 percent of each nation’s income distribution.

One of the crucial factors in achieving those twin goals will be job creation on a large scale. The scale of that challenge is truly daunting. The global economy must create 600 million new jobs by the year 2027 with 90 percent of those jobs being created in the private sector.

Yet the story does not end simply with the creation of jobs. To promote shared prosperity, one of the urgent priorities – for economies large and small – is the creation of better jobs.

This is where competition policy has a critical role to play.Competition helps drive labor toward more productive employment.That’s an economic axiom, documented by voluminous academic research.

Competition achieves this outcome in two ways:

  • Improving firm-level productivity and,
  • Driving the allocation of labor to more productive firms within an industry.

Moreover, making markets more open to foreign competition drives labor to sectors with higher productivity or, at least, with higher productivity growth. Making jobs more productive, in turn, generally increases the wages they command. That’s in addition to established cross-country evidence on the impact of competition policy on the growth of Total Factor Productivity and GDP. 

Thus there’s compelling evidence that – far from being a job killer, as skeptics might fear – competition (over the long term) leads both to more jobs and to better jobs.

The key question then becomes whether these long-term benefits must be achieved at the expense of short-term negative shocks to employment, especially in sectors of the economy that may experience sudden increases in the level of competition.

Progress toward better jobs is driven partly by the disappearance of low-productivity jobs, as well as the creation of more productive jobs in the short run. Competition encourages that dynamic through firm entry and exit, along with a reduction in “labor hoarding” in firms that have previously enjoyed strong market power.

Two observations from World Bank research, however, add some further perspective on the short-term impact.

First, these short-term dynamics are generally characterized by more jobs being created than destroyed every year.

Second, the negative employment effect of a surge in Total Factor Productivity is reversed after only one year.

We can think of this competition-driven process, then, as one of transformation. Propelling workers from low- productivity, low-quality jobs to higher-productivity, higher–quality, higher-wage jobs.

Of course, as with any economic transformation, the short-term process involves some costs – to various degrees, depending on the context.

Thus, there can be no definitive answer to the question, “Does competition create or kill jobs?” The only answer to that question can be, “Which jobs? In which sectors? Over what time frame?”

The answer to these questions is also likely to depend on the source of the increase in competition – that is, the type of intervention driving the change.

At the World Bank Group, we’ve worked with many partner countries – some of whom are with us at this conference – to strengthen competition through various reforms across a number of markets. Many of those interventions provide mechanisms for the creation of more and better jobs.

We will continue to strengthen the evidence on what can be achieved in the jobs sphere through such interventions. I want to highlight just a few of these cases in particular.

First, from the agricultural sector - where the World Bank Group considers smallholder farmers to be job-holders - consider the results from introducing market-based mechanisms to drive competitive outcomes, in a sector where State Owned Enterprises operate.

In Rwanda, the World Bank Group, in 2012, advised the government on the design of a competitive bidding process for green-leaf tea by two state factories. As a result of this initiative, the country’s 60,000 tea farmers saw their incomes increase by an average of 35 percent.

In Kenya, there were similar results in the tea sector after the Competition Authority facilitated the licensing of specialty tea factory – with some farmers seeing a 230% increase in the price paid per kilo for their product. This rise in the returns producers can achieve is a good example of what we mean by better jobs.

Such results, of course, suggest a number of further questions.

  • How do these income effects vary over time?
  • Are there “spillover effects” on producer participation and incomes in other sectors?
  • Does the threat of entry affect the type of supply contracts implemented in other sectors – for instance, contracts that might prevent farmers from switching?
  • Given that switching to a new crop is costly, how do the effects vary across skill levels and income levels?

Those types of questions illustrate the range of issues that call for further research.

Reducing barriers to trade and foreign investment can also affect the level of competition. By integrating into global value chains, and by increasing exposure to foreign competition, economies can benefit from higher productivity and stronger growth in the long run.

Granted however, these benefits involve some costs of adjustment in the short term. This holds regardless of whether the impact is from foreign or domestic competition. And those costs can be a very real concern, particularly for developing economies.

World Bank research, in fact, finds that labor-mobility costs for developing-country workers are more than twice as high as for those in developed economies.

Those concerns also depend on many complex factors, including labor-market regulations; sector characteristics; the degree to which the increase in competition triggers innovation or technological change; the skill level and educational attainment of the population; and any cost-mitigating policies, such as retraining programs or wage subsidies.

However, some empirical evidence suggests that after an adjustment period, opening markets has a positive effect. As an example, a 2014 study by the World Bank found that liberalizing the food and beverages sector in 47 countries would lead to an initial decline in wages in that sector, but that (with the exception of only four countries), after the adjustment period – an average of around 5 years for developing countries – real wages in food and beverages would in fact be higher in the new steady state.

At the same time, the rise in real wages in other sectors increases employment in those sectors. This means that instead of avoiding or hindering the transformation process, the primary role of competition policy will be in driving that transformation; while our colleagues across government continue to work to minimize policy frictions which can make adjustment costs unnecessarily high.

One of the most crucial of the factors affecting the benefits from opening economies to foreign competition is the level of domestic competition. Many studies show that domestic competition is vital in helping trade liberalization have a positive distributional impact.

That impact shows up in terms of the benefits being passed through down the value chain to developing-country producers, and in terms of bolstering the relative wages of less-skilled workers.

This underlines the important role that the decision-makers at our conference will play in ensuring that domestic competition is not undermined by anticompetitive barriers or behavior.

Finally, I’d like to leave you an overview of the scope we still have for strengthening our evidence on the topics that I’ve highlighted.

Let me conclude by underscoring that our discussions here will provide valuable insights into the challenges and opportunities that we confront when looking at competition through the job lens.

Our dialogue will surely provide us with a stronger platform from which to promote competition and improve social welfare.

Thank you very much.