Value of competition

Tuesday, 23 October 2018 00:00 -     - {{hitsCtrl.values.hits}}

The importance of competitiveness is talked about extensively but seeing it played out can sometimes be amazing. For the last few months Sri Lanka has been hammered by an appreciating dollar and rising oil prices that have forced the Government to curtail imports and hike up fuel prices. The corresponding increase in inflation has created much discontent and political pressure. But interestingly local taxi prices have been trending downwards because of competition, successfully offsetting fuel prices. 

Uber and PickMe are two cab companies that have started a price war, especially on their tuk-tuk services. Uber, which is more Colombo-centric recently added tuk-tuks to their app allowing their already reasonable prices to become even more competitive. In response PickMe initiated a 30% or Rs.100 reduction on all three-wheeler rides giving the chance for commuters to enjoy significantly lower prices even as fuel prices have trended upwards. 

This, in a nutshell, is the value of competition. It gives consumers access to goods and services at reasonable prices and helps the economy to function more efficiently in diverse ways. For example the moderate prices of Uber and PickMe have also pushed other three-wheelers to keep their prices unchanged as they would only lose more business if they were to increase prices. Often fuel price rises are detrimental for middle class consumers because private busses, which are heavily unionised, use strikes to demand higher fares. But the fact that three-wheeler taxis are less regulated coupled with deeper infusion of technology, has allowed the three-wheeler segment to function completely opposite to the busses delivering better value for money.   

Competition also promotes and protects the economic freedom of the public in different ways. For example lower commuter costs allow for other link-industries to develop as well. Both Uber and PickMe have launched food delivery options that help small businesses to grow and reduce the expenditure of operating individual delivery services. Competitive travel costs also allow people to be more mobile, especially if they are women, giving them the ability to work longer hours and meet their needs as they wish. Reasonable taxi costs also allow more people to be upwardly mobile and have most of the benefits of owning a car without actually having to purchase a vehicle, which is anyway very challenging given Sri Lanka’s complex trade deficit and foreign exchange problems. As they say, “a rising tide lifts all boats”.

Unfortunately duplicating competitiveness across the larger economy is becoming ever more difficult. As the rupee comes under more pressure the push is to introduce more protectionism through reducing imports. Limited funds that should be used to make Sri Lanka’s economy be more strategically competitive are being sucked into giving tax holidays for uncompetitive industries and restart outdated factories that produce import substitution goods. The latter also has limited impact in creating high paying services industry jobs that are desired by Sri Lankan workers. 

Ultimately reducing the competitiveness of an economy can uncouple it from global value chains and make it more challenging to foster growth. In a study released by the International Monetary Fund (IMF) earlier this year the top five most protected industries were listed as fruit and vegetable processing, bakery products, macaroni and noodle production, refined petroleum and distilled spirits. None of these are top exports showing that providing protection to industries at random does little to boost economic development.