SA economy is badly skewed to the big guys: how it can be changed


The Conversation

The Conversation

Simon Roberts, University of Johannesburg

The South African economy looks uncomfortably the same to the one inherited when the country transitioned from apartheid to democracy in 1994. Which is why it’s time for a robust economic policy agenda to make it more open, productive and inclusive.

A number of obstacles stand in the way. These include the continued bias towards activities with relatively low productivity, high levels of concentration in key sectors and a lack of diversity in ownership.

Competition policy is a critical part of efforts to change the structure of the economy. But addressing entrenched economic power requires a much wider package of measures.

International experience shows that countries develop by moving towards more diverse, higher value-added and more sophisticated products, a process referred to as structural transformation. There is still no sign that this is happening in South Africa.

In fact, research conducted by the Industrial Development Think Tank has found that South Africa regressed between 1994 and 2016. The economy has become less diverse and it’s failed to use existing capabilities to produce new products.

Take the country’s export basket. It continues to be dominated by minerals and resource-based industries, which represent 60 percent of total merchandise exports. This is at the expense of increased competitiveness in industries which create more jobs such as plastic products which range from simple lunch boxes to complex automotive components.

The composition of the export basket also compares poorly to other upper middle-income countries. For example, in 2016 high-technology exports accounted for only 6 percent of South Africa’s manufacturing exports compared to Thailand’s 21 percent and Malaysia’s 43 percent.

If South Africa continues on this path, it will struggle to create employment at the scale that is required. The majority of its population will continue to be excluded and the social fabric will continue to unravel.

Market concentration

High levels of market concentration coupled with barriers to entry are a big part of the problem. South Africa needs to allow for economic rivalry. Its known that rivals bring new products and business models, and spur incumbents to invest in improving their own offerings.

A recent study of merger reports by the Competition Commission found that there was unilateral dominance – where a single firm has a market share in excess of 45 percent – in a large number of markets. This included communication technologies, energy, financial services, food and agro-processing, infrastructure and construction, industrial input products mining, pharmaceuticals and transport.

These sectors cover most of the economy. They are central to economic growth and to consumers’ pockets.

And the situation seems to be getting worse. Statistics South Africa data show concentration levels in manufacturing has intensified: in 80 sub-sectors, the proportion in which the biggest five firms held over 70 percent of market share increased from 16 in 2008 to 22 in 2014.

Concentration is bad

Economic concentration opens the door to market power being exercised in a way that undermines productivity. This can be seen, for instance, in value chains where downstream players have to pay high prices for inputs, with dire consequences for their competitiveness.

The knock on effect is that economic growth slows down and employment creation is affected if downstream industries are labour-absorbing.

Such skewed economic power also translates into political power where dominant companies use their resources to lobby for ‘rules of the game’ that favour them. Some examples include:

The other area that has felt the effect of big player dictating the rules of the game has been in the slow progress when it comes to meaningful black economic empowerment. Economic transformation initiatives have tended to reinforce incumbents as gatekeepers in exchange for minority shareholdings.

Broader agenda needed

A lack of progress towards increased participation is one of the justifications for amendments to the country’s Competition Act. The Competition Amendment Bill is an important step in addressing concentration and increased participation. But it needs to be part of a broader competition policy agenda.

South Africa also needs to introduce a range of complementary policies. Three key areas, in particular, need to be addressed:

Promote new entrants: Economic regulations must be changed to favour entrants and ensure incumbents can be effectively challenged. This includes regulations to allow access to essential infrastructure. For example, in telecommunications, spectrum must be allocated to foster greater rivalry. Measures can also include soft regulation such as codes of conduct for supermarket chains to promote access to markets by suppliers and small retailers.

Enforcement: The country needs more effective enforcement against anticompetitive conduct that excludes smaller rivals. The Competition Amendment Bill goes some way to deal with this. It emphasises the competitive process and in important areas gives weight to the ability of smaller participants and black industrialists to enter markets and grow.

Support rivals: This can be done by expanding development finance for entrants. Funds could be drawn from competition penalties. Development finance should also consider extending support across the different levels of the value chain. An example is the funding that the Industrial Development Corporation has given to new entrants in the agro-processing value chain from the fund created from the bread cartel fines.

Talk of economic transformation needs to be backed by a coherent economic strategy that moves the country away from a concentrated, exclusionary, low productivity economy into an open, fair economy for all.

Pamela Mondliwa, a researcher at the Centre for Competition, Regulation and Economic Development at UJ, co-authored this article.

Simon Roberts, Professor of Economics and Director of the Centre for Competition, Regulation and Economic Development, University of Johannesburg

This article was originally published on The Conversation. Read the original article.


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