Middle Income Convergence Trap and the Role of Competition Policy in SEE Countries

Abstract

The aim of the paper is to explore whether and what kind of competition policy is desirable for SEE countries using growth rate optimisation as the criterion. The conclusion is that competition is good for the economic growth of the SEE countries. Their growth is based on the increase in the total factor productivity (TPF), mainly on account of the restructuring process and reallocation of resources, but also due to the adoption of modern technology. Competition provides key incentives for this type of economic growth and no disadvantage of competition has been recorded for the TFP based growth. Accordingly, effective competition policy in the SEE countries is essential for avoiding the middle income convergence trap. Taking into account that the business environment in the SEE countries still lags behind the business environment of “Old Europe”, that economic freedom is somewhat curtailed, and that there are still important legal barriers to entry, advocacy should be a priority of the competition policy. Additional efforts are needed for designing a suitable competition advocacy strategy, allocating resources needed for effective advocacy, and changing some of the legislative provisions to grant more power to the national competition authorities (NCAs) to conduct their advocacy activities. Taking into account that restructuring contributes significantly to the economic growth of these countries, and that mergers and acquisitions facilitate that process, merger control should not be an obstacle to this process. For that very reason it is important that merger control in SEE countries be lenient. The best way forward would be to increase the notification thresholds. Such a move would save some NCA resources, which can be allocated to competition advocacy.