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The most effective way for countries to improve the economic welfare of their citizens, a McKinsey study shows, is to increase the productivity of their companies, primarily by encouraging competition. Consumers benefit because when more productive companies gain market share, less productive ones must close their doors or become more efficient. Either way, consumers get better goods at lower prices. India's government, for instance, abandoned many limits on foreign investment in the country's automotive industry during the early 1990s. Prices fell, demand for cars exploded, and output nearly quadrupled.
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Yet in many poor nations, government policies—such as zoning laws, investment regulations, tariffs, and tax codes—continue to limit competition. For more on how policy makers can remove barriers to economic progress, read "The power of productivity."
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