Competition, Information and Development

Abstract

Developing countries suffer from weak institutions: inefficient tax systems, lack of auditing expertise, poor education, corruption, inefficient financial systems, lack of credibility of governments, capture of politicians and bureaucrats.This paper asks whether and how each of these problems calls for a different view of competition, to what extent competition helps solve these problems, and to what extent it is implementable.Even though the pressure of competition is generally favorable, some care must be exerted in implementing it in the context of weak institutions.The need to support institutional improvements and to condition aid on such changes is great. 1 Competition, Information, and DevelopmentJean-Jacques Laffont One way to provide more effective incentives, including enhanced consumer orientation, is to extend the scope for competition.-Joseph E. Stiglitz (1996) Competition is unambiguously a good thing in the first-best world of economists.That world assumes large numbers of participants in all markets, no public goods, no externalities, no informational asymmetries, complete markets, no natural monopolies or, more generally, convexity of technologies in addition to full rationality of economic agents, a benevolent court system to enforce contracts, and a benevolent government with lump sum transfers to achieve any desirable redistribution.Developing economies are of course very far from this ideal world, and the policy question "Should competition be encouraged in developing countries?"must be raised in a more realistic framework.Economic theory (in particular, industrial organization theory) has already given a myriad of examples where some form of competition may be detrimental in industrial countries.Let me mention a few.Patent policies that limit competition to create incentives for innovation are desirable to deal with the public-good nature of discoveries. 1 More generally, ex post restricted competition is often the only way to encourage investments in specific nonobservable assets in a relationship or an organization.2 Natural monopolies require a small number of participants.Ex ante competition in the form of auctions may be organized but ex post

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