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How SA’s businesses keep the country poor

It’s not just labour markets, businesses are also to blame.

South Africa’s labour unions often shoulder a lot of blame for the country’s low levels of productivity and poor manufacturing competitiveness – the argument being that restrictive labour laws and relatively high wages for people with few skills makes South African manufacturing uncompetitive and unproductive.

This is a legitimate argument, and one backed up by plenty of research, but it’s really only half the story. On other side of South Africa’s competitiveness problem is the structure of the country’s industries.

Simply put, South Africa has far too many monopolies and oligopolies. In industry after industry, there are only one, two, or a handful of competitors dividing up the market. This means that prices in South Africa are much higher than they should be, that the quality of products and services is lower than it should be, and that South African companies are less innovative and efficient than their peers in more competitive environments.

Consider, by way of example, the case of DStv. As happens every year, DStv recently announced it would upping its prices, in some cases fairly sharply, without much in the way of changes to its offerings. A Moneyweb article on the increases attracted a number of comments from customers frustrated with the price increases and with DStv’s relatively uninspiring content. However, despite their annoyance, few customers will be cancelling their subscriptions. The problem, as Moneyweb journalist Kentse Radebe and most of the Moneyweb community pointed out, is that even if customers are furious about the increase, there’s really not much they can do about it. There is no real competitor to DStv (apologies to Top TV), and so anyone who cancels their subscription is left with SABC, e.tv, and no chance of watching many major sporting events. This is an unappealing prospect, and so most people will just pay high prices for a substandard service. If there were a plausible competitor to DStv, prices would probably be lower and the selection of shows on TV would likely improve as the companies battled for customers.

This example illustrates the effect that a monopoly can have on individual customers, but the effect of uncompetitive product markets also extends beyond individuals. In the absence of competition, firms don’t have much incentive to innovate, or to find ways to become more efficient. Productivity stagnates, and firms tend not to aggressively develop new markets or products, which means an overall lower level of economic growth (since growth is primarily driven by efficiency, market expansion, and rising productivity). Furthermore, when a whole industry in a given country is uncompetitive, it can create a vulnerability that foreign firms can exploit to the detriment of local companies.

In its recent survey of the South African economy, the Organisation for Economic Co-Operation and Development (OECD) noted that South Africa has uncompetitive markets, and urged reform. Attributing South Africa’s below-par levels of growth and employment in large part to the lack of competition among firms (as well as to labour market issues), the OECD said that the country should “Strengthen competition by expanding the powers and resources of the Competition Commission, further liberalising the foreign trade and investment regimes, and avoiding a muddling of competition policy with other objectives.

The OECD also drew attention to the lack of competition in South Africa’s network industries (any industry in which customers must attach themselves to a network, like communications, transport, and electricity), which are dominated by state-owned enterprises (SOEs). They suggested reducing barriers to entry into these industries to promote new entrants, and unbundling the functions of Eskom and Transnet, which means breaking them up into their component parts (power generation, power distribution etc.) and setting up each component as an individual entity which would then demand more efficiency and lower prices from the other components.

Although the state is very unlikely to do anything to interfere with the SOEs, which offer a healthy income and an opportunity for handing out state jobs to supporters, it is certainly worth noting the role that SOEs and monopolistic private companies play in holding back South Africa’s development. Increasing competition by reducing barriers to entry, using the Competition Commission to pursue competition issues (and not things like BEE compliance or other non-competition issues), and getting serious about promoting competitiveness in markets dominated by the SOEs is one way that government could boost South Africa’s growth without challenging key constituencies like labour unions (which we discussed last week). South Africa’s business leaders could also take some responsibility for the uncompetitive state of many domestic industries and try to promote entrepreneurship and increased competition. In the long run, it will benefit everyone. 

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