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| Opportunities & Exposures: Policy |
Business Blockades
William W. Lewis
11/01/2005
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The euphoria that broke out in the early 1990s at the World Bank and among
development economists is long gone. The fall of the Berlin Wall and the wave of
democracy and market reform that swept around the world did not lead to a new
growth path for poor countries. Instead, disillusionment with conventional
prescriptions for good economic policy now spans the globe from Russia to
Argentina to Korea.
 Advice from the World Bank is fine as far as it goes. However, it woefully
underestimates the pernicious effect of distortions in competition at the level
of day-to-day operations of companies in poor countries. Poor countries become
rich when more-productive firms compete with less-productive firms and force the
less-productive firms to increase their productivity or fail. In virtually all
poor countries, this process is proceeding at less than half its potential
rate—and sometimes not at all.
Because Japan is a strange combination of a very rich country and an almost poor
country, it demonstrates how these distortions can affect an economy. Japan’s
productivity in manufacturing cars, steel, machine tools and consumer
electronics is the highest in the world, and 20 to 30 percent greater than U.S.
companies in these industries. But Japan’s productivity in food processing, the
largest employer of all, is only one-third that of its U.S. counterpart. In the
much larger service industries, productivity in Japanese retailing is 50 percent
that of the U.S., and in residential construction, it is only 40 percent that of
the U.S. The net result is that Japan’s GDP per capita is only about 70 percent
that of the U.S., despite its extraordinary performance in selected
manufacturing industries.
If all of Japan’s industries performed like autos, steel, machine tools and
consumer electronics, Japan would be by far the richest country in the world.
All these industries have intense, relatively undistorted competition in Japan
and in other large markets around the world. On the other hand, if all Japan
performed like Japanese retailing, housing construction and food processing,
then the country would just be emerging from the ranks of poor nations.
These differences are occurring within one country where the same fiscal,
monetary, exchange-rate, education, health care, infrastructure and property
policies apply equally across industries. So clearly something important is
going on at the microeconomic level, where distortions are powerful enough to
offset all the macro conditions.
Retailing, for example, shows these distortions. Japan’s productivity in
retailing is so low because half of retailing employment is found in mom-and-pop
shops, compared with 15 percent in the U.S. Mom-and-pop shops in Japan don’t
have to sell very much to stay in business because they receive heavily
subsidized loans. Their assets easily cover the principal, while their shops sit
on some of the most valuable real estate in the world. Moreover, capital gains
taxes are high and estate taxes are low, so shopkeepers have no incentive to
sell during their lifetime.
Competition to the mom-and-pop shops was depressed for years through zoning laws
that ruled out big-box stores like Wal-Mart. Even when these laws were
overturned, they were replaced by environmental considerations—and the boards
that rule on these include local shopkeepers. Building highly productive
retailing stores in Japan is so arduous that Carrefour, the world’s most
successful international retailer, recently withdrew from Japan completely.
These micro distortions to competition are difficult to eliminate. First, they
are hard to find. Each distortion is unique to its market, and there are roughly
100 markets that matter in any comprehensive economy. Second, all incumbents
protected by the distortions are against removing them. These incumbents often
constitute an effective majority in poor countries.
The economic history of rich countries and the state of poor countries today
show that democracy is necessary, but not sufficient, to abolish distortions.
Consumers are the only countervailing majority to the incumbent special
interests. Only when politicians learn that they can be successful campaigning
against special interests on behalf of consumers do democracies have a chance of
removing the distortions. The resulting competition, intense but fair, yields
better products and services and lower prices for consumers. This is how
countries get rich.
Art by Matt Mahurin.
William W. Lewis, founding director of the McKinsey Global Institute, is the author of The Power of Productivity.
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