Global prosperity is not just about the big picture
Microeconomic factors hold the key to recovery, write Joaquin Almunia and Eduardo Perez Motta.
Since the global economic downturn began in 2008, debate has centred on the macroeconomic strategies and instruments used to address the crisis and foster recovery. But correcting imbalances and addressing short-term slowdowns or recessions, while important, should not be allowed to overshadow the need to establish long-term conditions for solid and sustainable economic growth.
So far, macroeconomic policy has borne both the blame for malaise and the hope that it can be overcome. But we should be devoting as much attention to the microeconomic problems - such as poor incentives, market failures and regulatory shortcomings - that led us into the crisis in the first place.
Indeed, just as microeconomic problems in the financial sector triggered a credit crunch and fuelled a global recession, so microeconomic factors hold the key to recovery. Many economies need to fix the financial sector and restore credit, while many more need to raise productivity in order to boost growth and create jobs. Some industries suffer from counterproductive and ill-conceived regulation; others are ailing as a result of monopolistic behaviour by dominant companies, or because they face a lack of effective competition and transparency in utilities and financial services. Fixing these problems would help us to return to growth and prosperity for all.
To achieve this, we first must follow the Hippocratic oath and avoid doing more harm. Governments around the world should ignore the temptation to relax competition to provide relief to particular industries or economic groups.
American economist Mancur Olson argued that stagnation in developed economies results from cartels and lobbies becoming more numerous and powerful over time, until they eventually drain a country's dynamism. Preserving a competitive environment in which markets remain open and contestable is the best tonic.
Efforts to relax competition have many faces. But all of them make an economy less productive and redistribute wealth to small, co-ordinated groups with vested interests and a strong inclination to lobby the government.
The most common approach is protectionism. But official measures to help national producers at the expense of domestic business customers and consumers are always short-sighted, for they fail to help producers to address the challenges that they will have to face sooner or later anyway.
Similarly, old-fashioned dirigisme - such as attempts to "pick winners", foster national "champions" or keep failed business models alive through state subsidies - is both harmful and doomed to fail.
Once we have stopped doing harm, we must start doing the right things. Relying on competition can help societies to unleash well-functioning markets' power to provide goods and services. To achieve this, policymakers must have a sound enforcement framework at their disposal, take an economy-wide approach, and attract the participation of all stakeholders.
Sound enforcement implies legal tools and resources to pursue and implement an economic policy, along with an institutional design that reduces meddling by vested interests. Consider, for example, the importance of impartial and effective antitrust authorities, or subsidy schemes that are sufficiently well designed to ensure that they truly serve the public interest.
An economy-wide approach is needed because markets are interconnected. Misguided regulation or market failures that harm competition anywhere can burden the entire economy. The global crisis erupted because major problems in the functioning of the banking sector had been left unaddressed.
Finally, strengthening competition requires broad support. This cannot be achieved without bridging ideological divisions and overcoming pressures from particular groups. There should be a consensus that a pro-competitive environment is one of the keys to economic prosperity.
Australia provides a good example of how pro-competitive policies deliver results. Its economy was one of the OECD's worst in terms of productivity growth in the 1980s; a decade later, Australia was in third place. In the interim, all of the country's economic regulation was examined from the standpoint of maximising competition, and a national pro-reform consensus was forged.
Structural reforms to boost productivity will also be crucial to ensure Europe's recovery and the survival of its social model. The Single Market Acts I & II provide a comprehensive agenda to tap fully the potential of an integrated and competitive market of 500 million consumers in the European Union.
We know from experience that competition works. By basing economic policy on this experience, we could not only avert Olson's grim prophecy. We could also accelerate recovery, increase the pace of innovation, and raise livelihoods for millions of people worldwide.