Improving Lives Through More Competitive Markets

In recent decades, Latin America and the Caribbean has expanded education, reduced poverty, and boosted macroeconomic and financial stability. Yet for all that progress, the region remains caught in a middle-income trap, with growth that’s too slow, inequality that’s too high, and aggregate productivity that’s too weak to lift it to a higher level of development and prosperity.

At the heart of that quandary lies an inescapable reality: Latin American and Caribbean markets are far too uncompetitive. With market concentration four times greater than in advanced economies, many firms wield price and wage-setting power, and innovation and dynamism suffer. On average, consumers pay 15% higher prices for goods and services than in advanced economies. Workers are undercompensated, taking home only 50 cents for every dollar of value they create, versus 80 cents in developed nations. Growth and productivity are stifled, far from what they could be in fairer markets.

The reasons behind that lack of competition and the reforms that might improve it lie at the heart of the IDB’s recently released book, Development in the Americas. Bolstered by a new set of indicators developed by the IDB called CompeteLAC, which describe how markets function across the region, the report shows how market fragmentation, regulatory distortions, and weak enforcement limit competition. It also illuminates how efforts by governments to deepen regional integration, make regulation more pro-competitive, and strengthen competition agencies could generate immense benefits for businesses, consumers, and workers. Indeed, as the report argues, if reforms could create levels of competition similar to those in advanced economies, GDP per capita would be 11% higher, and inequality would decline.

The Problems of Market Fragmentation

Consider the problem of market fragmentation. Long distances and poor transport infrastructure make it difficult for entrepreneurs to reach customers, gain access to suppliers, and adopt new technologies. They also prevent workers from moving to different jobs and industries. In this way, poor transport connectivity inhibits the ability of new firms to challenge incumbent ones with better goods and services and entrenches the power of established firms over the labor market. The lack of harmonized standards and weak cross-border infrastructure has a similar effect on cross-border trade. It divides Latin American and Caribbean economies into smaller, disconnected markets that smother competition and prevent firms from reaching scale, consolidating incumbent firms’ price and wage-setting power in the process.

Technological incompatibility, meanwhile, leads to a different kind of fragmentation. In telecommunications and digital payments, for example, incumbent firms maintain their market power through closed systems that raise switching costs and reduce interoperability. Across the region, customers used to be locked into their cell phone providers, as switching would mean losing their phone numbers, along with the services and social networks linked to them. Then, countries introduced number portability, allowing customers to retain their phone numbers when changing providers. As a result, competition intensified, with firms offering lower data prices, larger data packages, and other new options.

Or take the case of Uruguay, which used to require financial institutions that process credit or debit card payments on behalf of a merchant to limit themselves to a single card network. As a result, merchants were required to maintain multiple contracts to accept various cards. Then, a reform allowed such financial institutions to process multiple card brands. This reduced market concentration, enabling new entrants into the payments market, and led to innovations like better anti-fraud tools and faster settlements — all illustrating how the right reforms can inject dynamism into markets and better serve consumers.

Institutional Reforms to Boost Competition

If governments are to open up markets, foster technological adoption and innovation, and boost growth through greater competition, institutional reform will be essential. Today, many regulations in the region make starting or expanding a business exceedingly burdensome. Licensing systems can be too complex and costly, and tax regimes, sometimes intended to favor smaller companies, may instead discourage them from expanding, inhibiting growth in the larger economy. Reforms, backed by evidence-based regulatory and tax reviews, are needed. The enforcement powers of antitrust agencies must also be enhanced. Such agencies tend to lack resources, independence, and legal authority, preventing them from curbing behavior such as collusion and harmful mergers that restrict market access and harm consumer welfare.

Overcoming Resistance to Reforms

Necessary reforms, however, are too often resisted by politically connected industries that frame competition as a threat to jobs and development. They argue that more competition risks job losses, especially in small firms. But while small, low-productivity firms may indeed contract or even exit the market, greater competition allows productive entrepreneurs to enter the market, expand their businesses, hire more people, and pay better wages. Moreover, as productive firms grow, informality decreases, leading, among many other benefits, to greater tax revenue. Innovation and investment also increase. Governments need to explain these benefits to the public and ground reforms in legislative action.

Today, Latin America and the Caribbean remains at middling levels of productivity, innovation, and growth, which fail to reflect its immense reserves of talent and resources. Reforms that would ensure fair competition and lower barriers to entry for creative entrepreneurs could both change those dynamics and lead to better quality jobs and better goods and services. We hope our book provides a useful map of how that can be achieved.