What has competition done for Europe? It provided decent governance

Giancarlo Spagnolo 06 August 2007

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Politics is an interesting animal when observed through an economist's lens.

Nicholas Sarkozy, who won the trust and the vote of the majority of French people, as a first ‘important’ act at the international level managed to (dangerously easily) persuade fellow leaders to remove the principle of “free and undistorted competition” from Article 3 of the old constitutional treaty.

We should recognise that there is an emerging generation of successful, non-left-wing European politicians, from Sarkozy to Putin, who borrow from populist arguments to push against free and fair competition.

As everybody above 14 years of age should by now have learned (from history books), markets work well only if there is sufficient competition. Competition is what forces firms to be efficient. The threat of losing customers to better-performing rivals is what forces firms to improve continuously. It should be obvious to everyone that competition is the force that ensured and ensures that at least some European firms are still able to produce efficiently, innovate, and create/maintain useful jobs, politicians notwithstanding. In short, competition is why market economies are efficient.

Anybody above 14 should also have by now understood that when there is no competition, markets become dominated by fat monopolies or cartels. Absent competition, managers can pursue self-serving objectives such as maximising rents and minimising effort – exactly the opposite of what they need to do to serve the people.

We should also have finally understood that the political objective of European market integration – the creation of interdependence and reduction of the chances of conflicts between states sometimes led by crazy politicians – can only be achieved with competition. A key part of this is to allow enterprises from one country to freely enter and establish business relations in the others.

The interesting question therefore is not the one in the title. Rather, it is: Why do so many politicians dislike “free and undistorted competition”? Why do they instead champion “captured and distorted competition”?

There must be some simple, basic reason why so many politicians from so different parts of the political spectrum in so many countries like to attack competition. An obvious candidate is that ‘competition does not vote’, while ‘monopolies do’. As we all know, ‘consumers’ are not an organised lobby in any country, while producers are very well organised (incumbent firms, their owners, managers, employees, creditors, etc.).

Competition and corporate behaviour

I would like to instead to draw back attention to another, related argument, taken from the literature on Corporate Governance and often debated some years ago, but somewhat forgotten in recent debates.

One reason why intense, healthy product-market competition is considered a main driver of good Corporate Governance is that if a firm adopts inefficient governance practices, competitors will then steal its customers offering better deals, eventually driving it bankrupt.1 In other words, if competition is intense, managers and other insiders have little time and profits to steal. Firms are ‘lean and hungry’; profits must be re-invested to survive. Managers’ time is intensely needed to fight rivals and innovate.

A very similar argument applies to political competition, a basic and necessary ingredient to get decent governance at the national level.

It is a small step to look at all this from the perspective of a ‘smart’ politician.

One nice thing for politicians - when they manage to shield a ‘market’ from competition – is that the actors dominating that ‘market’ are typically extremely grateful to them, not least because they have the time and the resources (extracted from consumers) necessary to be grateful and reciprocate the favour, in one way or another. Competing firms, instead, are on the frontline of the war to serve customers, they are constrained by competitors and don’t have much time or resources to grant favours to politicians.

It is an old story; let us not forget it… it may be the real one!


1 For a review of the literature, see “Corporate Governance and Collusive Behaviour,” Paolo Buccirossi and Giancarlo Spagnolo, CEPR Discussion Paper, 6349, June 2007.

 

 

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Topics:  Competition policy Politics and economics

Tags:  competition, politicians

Professor of Economics SITE - Stockholm School of Economics and University of Rome Tor Vergata, Research Fellow EIEF and CEPR

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