A More Competitive Latin America: How Breaking Up Market Power Could Lift Growth and Narrow Inequality

Why the IDB’s call for competition matters now

The Inter-American Development Bank released a report saying that more competition across Latin America and the Caribbean could boost living standards and make incomes more equal. In plain terms: if markets were less protected by big firms and barriers to entry fell, average income per person would be noticeably higher and the gap between rich and poor would shrink.

The timing matters. Growth in much of the region has lagged peers, productivity gains have slowed, and many countries still register some of the world’s highest income inequality. The IDB frames competition policy as a lever that can both raise output and spread the gains more broadly — not by transferring money, but by changing how firms set prices and invest.

What the study finds — who gains and when

The headline result is simple: the IDB estimates that stronger competition could raise GDP per person by roughly 11% and reduce measured inequality by about 6%. Those are aggregate figures; the report models a set of reforms and runs them through an economy-wide framework to estimate medium-term effects.

Most of the gains come from lower markups — the extra amount firms charge above costs — which would lead to lower prices, higher demand, and a more efficient allocation of workers and capital. The model assumes reforms are phased in and shows much of the benefit building up over the medium term, typically over a decade. That means policy changes today would mostly pay off over several years, not overnight.

In absolute terms, large economies such as Brazil and Mexico would see the biggest aggregate boosts because they simply have bigger markets. But smaller or more concentrated economies could see larger percentage gains per person if they tackle sectors where a few firms dominate. The sectors flagged as most sensitive to competition reforms include utilities, telecommunications, retail, transport and some parts of finance and wholesale trade.

Which reforms drive the change

The IDB is specific about the policy levers that matter. Stronger antitrust enforcement tops the list: clearer laws, faster merger reviews, higher fines for collusion and more resources for competition authorities. That reduces the ability of firms to block rivals or set coordinated prices.

Regulatory reform also plays a big role. Removing unnecessary licensing barriers, simplifying rules that make it hard for startups to enter, and cutting needless limits on foreign investment all lower entry costs and spur new firms. Market-opening trade measures, such as easing import rules in concentrated product markets, are another channel.

Reforming state-owned enterprises and public procurement matters too. In many countries, state firms crowd out private players or enjoy special protections. Greater transparency in contracting, independent oversight of state companies, and selective privatization or managerial reforms can inject competition into sectors that have been closed off.

Put together, these changes work by making markets less cosy for incumbents and more dynamic for challengers. The IDB’s modelling suggests antitrust enforcement and easing entry barriers account for the bulk of the projected GDP and distributional gains.

What investors and policymakers should watch

For investors and debt holders, the implications are mixed but meaningful. Higher sustained growth and a fairer income distribution can strengthen public finances over time — better growth usually means healthier tax receipts and less pressure on social spending. That can be positive for sovereign credit profiles and, by extension, for local-currency bonds and exchange rates over the medium term.

Sector winners and losers are more visible. Firms in utilities and telecommunications that currently enjoy protected market positions could face margin pressure as competition heats up. Banks may face tougher competition on fees, but they could benefit if lower prices and higher activity expand lending volumes. Retail, transport and consumer-facing businesses that thrive on scale and innovation are likely to attract investment as barriers fall.

For foreign investors the message is twofold: more open markets offer new opportunities, but stronger enforcement of competition rules raises regulatory risk for incumbents and large cross-border deals. Active investors who seek structural growth may find attractive entry points; conservative holders of monopoly rents should prepare for a changing landscape.

Political and practical limits to the gains

The largest caveat is political economy. Incumbent firms have power and can lobby hard against reforms that threaten profits. Populist governments may also prefer visible subsidies or controls that protect certain groups rather than structural competition fixes. Administrative capacity is another constraint — competition authorities in some countries lack staff, data or independence to implement an ambitious agenda.

There are also short-run distributional trade-offs. As markets open, some workers and firms will lose advantage and may need time to adjust. That creates political friction and can slow or dilute reforms, pushing big gains further into the future.

How the IDB reached its numbers — and what to probe next

The report uses an economy-wide model that links markups and market structure to output and income distribution. It builds on firm-level studies that measure how far prices exceed costs, then simulates the effect of reducing those gaps through policy changes. As with any model, results depend heavily on assumptions: how quickly reforms are implemented, how firms respond, and how informal sectors are treated.

Analysts and reporters should ask for country-level breakdowns, the assumed timeline for each reform, and firm-level markup estimates used in the simulation. It’s also important to explore alternative scenarios: weaker enforcement, partial reforms, or offsetting shocks like commodity price swings. Those follow-ups will show whether the headline gains are realistic or conditional on an unusually smooth reform path.

The bottom line: the IDB makes a persuasive, evidence-based case that competition policy is not just about markets — it is a tool for growth and a practical lever to narrow inequality. Whether those gains arrive depends on politics, institutions and the patience to carry reforms through.

Sources

• prnewswire.com