Developing agricultural economy into an industrialized and

Developing countries are very different from each other and the details
of competition policy should certainly be tailored to each. However, laws and
policy tools are not continuous variables, therefore some counties will have
competition policy, the essence of which is the same. The most difficult part
of determining optimal competition policy is to evaluate the economic factors
that most influence market competition and vice versa and then determine the
thresholds that divide countries into groups, which are different to a degree
that would warrant competition policy that is substantially divergent.


For the purpose of studying market competition we believe that countries
should be separated into developmental stages. However, this issue itself is
subject to controversy. There have not been any significant attempts of
classifying countries into stages of growth based on their economic structures
in recent years. Rostow (1959) divided a country’s developmental process into 5
broad stages that describe the movement from an agricultural economy into an
industrialized and then service and innovation driven economy. The first stage
is of the Traditional Society, which
is characterized by a predominantly agricultural economy that consists of small
scale farms with limited trade and capital; the second is called the Pre-conditions for Take-off stage, which
describes how the agricultural economy increases productivity by adopting
technologies, starts to trade and gradually increase savings, which are
invested; third stage is Take-off,
where the savings and investment accelerate and the manufacturing sector starts
to overtake the agricultural; the fourth, Drive
to Maturity, describes how the transformation continues and the economy
increases the number of manufacturing industries that are becoming less
dependent on labour and capital inputs and innovation becomes more important;
the last stage, maturity or Age of Mass
Consumption, is supposed to describe the modern developed economy that
grows due to its innovation and where the predominant sector is services. This
is a useful, yet very low-resolution picture. 

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When we speak of developing countries, we normally talk about the group
defined as such by the World Bank, more specifically by the eligibility of
loans from the IBRD or the IDA. Even the WB has recently scarped the term of
developing countries and instead classified them solely on the basis of GNI per
capita into 4 income groups: low-income; lower-middle; upper-middle and
high-income (World Bank, 2016). Developing countries are considered all but
those in the high-income group. The United Nations (UN) and the International
Monetary Fund (IMF) also have their own classifications. The UN uses the Human
Development Index (HDI), which is based on life expectancy, level of education
and income, whereas the IMF groups countries on the basis of development into
advanced and emerging and developing countries, however does not have a clear
and objective methodology or explicit thresholds for the classification
(Nielsen, 2011).


There are many factors that could be argued to describe a country’s
level of development in addition to income. Most of them will also influence
the way markets function and the appropriate competition policy. Examples
include the level of infrastructure and capital markets development, human
capital, predominant sector in the economy and cultural attitudes towards
competition and anticompetitive practices (Indig, Gal, 2015). However, there
currently is no methodology of combining all these factors to create one


For the purpose of studying market competition we should divide
countries based on their economic structures in a way that is relevant for
growth. In the section on Competition and Development the concept of the
product space, developed by Hausmann and Hidalgo (2009) has been
discussed.  The product space describes,
which products require the most complex capabilities to produce them. It
resembles a network or tree of branches that are denser in some parts of the
space than others. The manufacturing and technology sectors are much denser
than those of agriculture. Each product has branches that connect it to other
products. They represent the substitutability of inputs used in connected
products. The shorter the branch the more related the inputs are. The authors
have developed an indicator that describes where each economy is in the product
space, called the Economic Complexity Index (ECI). Economic complexity is
defined as follows:


“Economic Complexity – A measure of the knowledge in a society as
expressed in the products it makes. The economic complexity of a country is
calculated based on the diversity of exports a country produces and their
ubiquity, or the number of the countries able to produce them (and those
countries’ complexity).”1


This indicator is a very useful representation of the economies
complexity and stage of development with regard to its structural
transformation instead of accumulation of factors. The researchers have shown
that it is a good approximation of the capabilities of production a country has
and hence the opportunities to develop new products and grow. It is correlated
to income per capita and can predict future growth. If an economies GDP is
below the level predicted by the ECI, the countries growth will be higher; if
it is above that level the country will grow slower. This is because economies
with a higher ECI have the necessary conditions for growth, whereas economies
with a lower index have exploited their existing capabilities.


This indicator has a strong potential to provide the type of description
of an economy that is relevant to market dynamics and structure and hence
competition. For this reason it serves as better measurement for the countries
stage of development in this context and should be used to study the effects of
competition on growth in different country groups. For example, Malaysia and
Chile are both developing countries with Chile having a higher GDP per capita
than Malaysia. This would indicate that Chile is a more developed economy,
however when we look at the product space of these two countries, we see that
Malaysia has a much more diversified portfolio that is more concentrated in the
manufacturing and electronics area of the product space, which is connected to
more business opportunities that the economy can expand to. Malaysia is growing
much faster than Chile, which is in support of the product space theory
(Hausmann, Klinger, 2007). For the purpose of studying market competition it
would be more reasonable to use the ECI than GDP or GNI, because it more
accurately represents the complex Malaysian economy.


Data for the ECI is freely available on its website2 and is
published annually in the Atlas of Economic Complexity (Hausmann et al, 2014).

In 2016, unsurprisingly, Japan, Switzerland, Germany, South Korea and Czech
Republic have topped the rankings, whereas Nigeria, Guinea, Cameroon, Papua New
Guinea and Mauritania were in the bottom among 122 countries. Unfortunately,
the index is continuous and has not been separated into stages or other groups
based on a numerical threshold. Hence for the purpose of an empirical study of
the effects of competition on growth in different stages of development some
cut off points should be determined. Firstly, we should remove the high-income
countries from the list and separate the remaining countries into three parts
with the same number of countries in each. Secondly, in a regression of a
competition indicator on growth, we should test and see if the stages have
significant effect and adjust the groupings of countries to see the best fit.

However, it would only be possible to determine these stages if the empirical
analysis were carried out, which is outside the scope of this paper.




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