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Boosting competition for faster growth in Africa

By Abebe Aemro Selassie
28 October 2019   |   2:29 am
Heightened trade and geopolitical tensions have resulted in a broad-based global economic slowdown. Sub-Saharan Africa is also feeling the consequences of this more challenging global environment.

Heightened trade and geopolitical tensions have resulted in a broad-based global economic slowdown. Sub-Saharan Africa is also feeling the consequences of this more challenging global environment. While growth in the region is expected to continue at 3.2 percent in 2019, it is weaker than what we projected at the time of our last forecast six months ago. Importantly, it is not just a few countries impacted. Growth has been revised down in two-thirds of the countries in the region, albeit by a modest 0.3 percentage points on average.

This slowdown comes at a time when countries need to grow at a much faster pace to create jobs for the 20 million young people entering the workforce in sub-Saharan Africa. Against this backdrop, what can countries do to raise their growth prospects? More competition between firms can play an important role in boosting private investment, productivity growth, and external competitiveness. Our recent work shows that competition between firms in sub-Saharan Africa is lower in comparison to the rest of the world.

This means consumers face higher prices than in similar economies. Firm markups—an indicator of how much higher prices are above the cost of production—are, on average, 11 percent higher in sub-Saharan African countries than in other emerging markets and developing economies. As in other parts of the world, these markups have also been increasing in several sub-Saharan African countries in recent years including in the region’s largest economies, Nigeria and South Africa. On average, firm markups tend to be higher in the services sector, among the less-diversified oil-exporting economies, and across state-owned enterprises that are also more prevalent in sub-Saharan African countries than elsewhere.

Increasing competition can have substantial benefits for the region. More competition can increase real GDP per capita growth by about 1 percentage point—implying a doubling of the pace at which living standards are currently increasing in the region (purchasing power parity terms). Importantly, it can also benefit consumers directly by lowering the prices of goods and services, especially of essential items. For example, food prices are 27 percent higher in sub-Saharan Africa, on average, than in other developing regions and about a third of this difference could be eliminated by improving competition.

How can competition be improved in the region? A wave of reforms in the late 1990s and early 2000s helped raise growth potential in many sub-Saharan African countries, but the reform momentum has slowed down in recent years.A renewed and holistic approach is needed to improve competition. This requires an effective policy framework including an adequate competition law backed by an independent and well-resourced competition authority. Reforms that allow more private sector businesses to enter the market are also essential. Complementary policies such as openness to trade and foreign direct investment are also key to fostering competition. In this context, implementing the African Continental Free Trade Agreement presents a unique opportunity to enhance competition and boost growth in the region. Moreover, other macroeconomic policies—notably, fiscal, and procurement policies—need to be carefully designed so that they do not distort competition by creating an uneven playing field among market players.

It is worth recognizing that all these policies tend to be mutually reinforcing—for example, trade and investment liberalization stimulate competition, but an effective competition policy framework is required to ensure that gains from openness are realized and markets are not taken over by a few large firms engaging in unfair trading practices. With the right combination of policies, a healthy competition environment can be created in sub-Saharan Africa that can help improve macroeconomic outcomes.
Selassie is director, African Department at the International Monetary Fund.

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