Market competition and poverty dynamics: Short and long run effects across financial development levels
By Mohamed Chaouch, Thanasis Stengos
DOI https://doi.org/10.48550/arXiv.2511.13875
Abstract
This paper examines the relationship between market competition and poverty dynamics over time, focusing on countries with varying levels of financial development. The authors utilize annual data from 48 countries between 1991 and 2017. They employ a functional econometric framework that captures both immediate and delayed effects of market competition on poverty. Key findings reveal that initially, stronger competition led to increased poverty during structural reforms, but this negative impact diminished after 2010 as economies adjusted and efficiency gains materialized. Additionally, the research shows that the effects of competition on poverty can last for several years and vary significantly depending on a country’s financial development level. Specifically, in low- and medium-development countries, competition has a positive lagged effect on poverty, while in high-development countries, the effect tends to be weakly negative or insignificant.
Introduction
The authors emphasize the ongoing challenge of poverty reduction and the complex factors at play. They explain that many low- and middle-income countries have undergone structural reforms aimed at promoting market competition—actions like privatization and deregulation—to increase efficiency in the economy.
Competition is generally considered beneficial as it can lead to lower prices and improved resource allocation; however, its impact on poverty is not straightforward. The effects can vary based on several factors, including how gains and losses from competition are distributed across different income levels.
Poor households often feel the effects of competition through changes in prices for essential goods like food and healthcare. Reduced market power can lead to lower prices, which benefits poor consumers. Conversely, increased competition can harm low-income households by forcing job losses and wage reductions. The authors draw attention to how factors like access to finance, asset distribution, and labor market structures influence how competition impacts poverty.
The literature on this topic is diverse but limited in terms of empirical findings directly linking competition to poverty outcomes. Traditional analyses typically ignore the dynamic nature of both competition and poverty over time, limiting their understanding of the long-term effects of market competition on poverty.
Findings
Impact of Competition on Poverty
Immediate Effects: Initially, stronger market competition resulted in increased poverty levels, particularly during early reforms when labor markets are adjusted. This finding correlates with the idea that transitions to more competitive markets can lead to job losses and firm closures, negatively impacting vulnerable populations.
Long-Term Effects: Over time, particularly after 2010, the negative relationship between competition and poverty began to weaken, suggesting that as economies adapt, competition becomes less harmful and even beneficial. Efficiency gains often materialize, leading to lower prices in essential markets, which supports poverty reduction.
Financial Development Influence:
- Low and Medium Financial Development: In countries with lower levels of market capitalization (financial development), increased competition often has a pro-poor effect over time, helping to lift individuals out of poverty as structural bottlenecks are addressed.
- High Financial Development: In contrast, in countries with advanced financial systems, the effects of increased competition are less significant and can be negative. Financial systems in these contexts are typically strong enough to buffer against job losses, and existing social safety nets alleviate the pressures caused by competition.
- Lagged Effects: The paper highlights the importance of lagged effects, suggesting that changes in competition can affect poverty levels over an extended period (up to five years), emphasizing the need to consider these dynamics in policy evaluations.
Methodology
The researchers applied functional data analysis to model both poverty and competition as continuously evolving processes, allowing for a more nuanced exploration of their relationship across time. Traditional static models would have obscured these dynamic effects, which are critical to understanding the evolving nature of poverty in response to competition.
Empirical Results
The estimation provided evidence that the relationship between competition and poverty is not uniform; it varies across countries depending on their financial systems. For example:
- Both high and medium-market-capitalization economies showed a gradual improvement in poverty conditions after initial shocks from increased competition.
- In low-capitalization economies, competition consistently showed slight anti-poor effects in the immediate aftermath, though improvements emerged later.
Conclusion
The study concludes by emphasizing the complex interplay between market competition, poverty dynamics, and financial development. It suggests that proper policy frameworks must consider these dynamics rather than relying solely on static models or averages over time. Policies that foster competition can effectively reduce poverty, particularly when accompanied by robust financial systems and institutional frameworks. The authors advocate for further research employing new methodologies, such as functional quantile regression, to capture the distributional effects of competition across varying income groups and contexts. Overall, this research contributes to understanding how carefully designed competition policies can support sustainable and inclusive economic growth.