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SA’s economy is badly skewed to the big guys

Here’s how it can be changed.
South Africa needs a robust economic policy agenda to make it more open, productive and inclusive. Picture: Shutterstock

The South African economy looks uncomfortably the same to the one inherited when the country transitioned from apartheid to democracy in 1994. This 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% 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% of South Africa’s manufacturing exports compared to Thailand’s 21% and Malaysia’s 43%.

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% – 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% 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:

  • Telkom, a partially state-owned telecommunication company, has for a long time persuaded policymakers, in the name of extending access, to support its position in the fixed-line monopoly.

  • There’s been similar strong lobbying in pay TV to secure rules that hinder potential rivals.

  • In beer distribution and retail, Anheuser-Busch InBev spent millions of dollars lobbying against conditions that would have restricted its operations .

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 gate keepers in exchange for minority shareholdings.

Broader agenda 

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.

The ConversationPamela Mondliwa, a researcher at the Centre for Competition, Regulation and Economic Development at UJ, coauthored 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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COMMENTS   14

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Thank you Simon for a really great read. Herein lies the road to prosperity in South Africa.

What a refreshing and very sensible article by Simon and Pamela! One can just hope that the decision makers in Government and in the business sector take serious note of such valuable input.

It’s a clear, logical and sensible read….Now, comes the politicians and a 2018 election and all logic and sense disappear.

In a nutshell all that has happened since 1994 is just a lot of politicking and bickering.

As mentioned till 2019 we will have empty promises and more politicking. when will we get down to work?
The side show will be the 15 year soapy called “The Zuma Show” jamming the courts with denials.

The author seems to imply that market concentration is caused by a lack of competition. This is false. In any domain where there is competition, you will have a few victors and mostly losers. This is a fact. Please look up the Pareto principle. Also known as the 80/20 rule. 20% of businesses in a competitive environment will do 80% of the business.

In sports and other fields it also holds true. Only a few golfers are successful, the vast majority are unsuccessful.

Well said.

this article, part from a few comments is a load of socialist BS.

Our decline from 1994 has everything to do with well known social race based re-engineering and little to do with the factors above.

Quoting the Competitions Commission, an anc tax gathering body is laughable.

The Enforcement and Support paras are simply disgusting and in fact vomit inducing.

MW continues to peddle this liberal/socialist agenda that led to the downfall of the founder A Hogg.

Pareto is a distribution, statemetn from an observation, not a rule that this need to be a fact…

Go back to real sciences, the dangers of running around with non-exact sciences disciples is real.

Currently SA is more a 99/1 society.. that distribution was not so established when Vilfredo Pareto obsewrved his..

It will forever remain a 99/1 society (like the rest of the world) until the ” 1 ” change their behaviour.

Tough but true.

No tears should be shed for the ” 1 “. Their predicament is mainly their own fault.

SA is not a 99/1 society by the way.

In fact, out wealth distribution is almost identical to the United States:

South Africa United States
Top decile (10th) 74.9% 75.4%
9th decile 11.4% 11.8%
8th decile 5.8% 6.1%
6th and 7th decile 5.5% 5.8%
Bottom half 2.4% 1.1%

SA has been home to some of the greatest monopolies in history:
The VOC [Dutch East India Company] – considered the first global monopoly
De Beers
The ANC – in its narrative of “the Struggle” and its capture of the economy.

We need to undo the legacy of these

Sadly, the biggest obstacle is the last: the ANC’s control over public education is crippling competition and competitiveness

South Africa was no the home of the Dutch East India Company, the Netherlands was. The company was by default a monopoly since it was the first company ever. The company has no legacy since it stopped doing business in 1799.

IMO there is almost no capital to startup and development. Not talking about startups in tech – I am referring to real businesses with real workers and real products, not paradigm shifting disruptors offering solutions to problems that don’t exist.

Those are where jobs will come from, so instead of more and more retirement funds chasing the same old boring non-growth big listed company equity and bonds and property, we need a 5% allocation to development finance. If we can get a few of these going in different cities and towns, equipped with mini industrial parks and advisors we can create a real economy.

Nonsense article. South Africa is being throttled by statism and parasitals that are not run on fundamental business principles. These include Eskom, Telkom, Transnet, SAA and the Post Office. Privatise these bottomless pits that destroy wealth and consume capital.

The next step is to free the labour market and make it attractive not punitive to open a business.

The reason why more smaller businesses do not open because of the access to capital and skills. About 1000000 skilled people have been exiled by the ANC’s racist employment and tender polices. They now build Australia and will soon to be joined by their skilled South African farmer compatriots who are earmarked to open the Northern Territory agriculture. I kid you not

Let’s talk capital: South Africa is capital starved. This is why interest rates are so high. The marginal productivity of capital is the interest rate and this is sky high.

Q: Who would invest in a country that does not respect property rights and can arbitrarily expropriate land without conpensation?
Q: Who would invest in a country where business is being strangled by labour legislation, militant unionism and red tape pertaining to the race of the owners and workers?
Q: Who would invest in a country where the best their academics can offer is more statist interference in the economy?

A: Only if the returns were very high. For “high” and lower returns your investment capital will flow elsewhere. And it does.

The ANC truly have a mountain of accusations to answer for.

Is pension funds not part of the problem. Only investing in safer blue chip companies thereby channeling capital toward larger companies that promotes monopolies. Today people invest in companies through he JSE not by lumping 10 investors funds and opening a SPAR on the corner. SA need a lot more smaller businesses which is too capital intensive for most but with a little cooperation businesses that require 1 to 10 to even 50 million in capital can be opened. We have a culture of looking for jobs instead of opening businesses. But then also everything mentioned by Richard “don’t be ridiculous” the Great is also true.Property rights, labour market flexibility is important. The education system needs to be more relevant. What is more important, to know trigonometry or how to open an online business via ebay.

End of comments.

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