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Markets, Regulatory Institutions, Competitiveness, and Reforms

Sep 2003
Stanford King Center on Global Development Working Paper
By  Saugata Bhattacharya, Urjit R. Patel

Recognizing the importance of transitioning to a markets-based economy, with the attendant benefit of competition, as the most effective method of increasing economic competitiveness, the paper discusses the consequent limitations and problems that are likely to arise during the transition. It confines itself primarily to infrastructure sectors (most often characterized by natural monopolies and network economies) and the financial sector (due to the systemic risk and widespread information asymmetries), since it is these that are the most susceptible to market failures. Regulation might be needed in limited areas in these sectors, but the scope of regulation should be strictly limited and declining. The role of the government is aligning incentives of the various stakeholders involved in a market economy and ensuring universal access to services through a well-designed subsidy structure.