The new competition bill is based on some dodgy numbers
That business in SA is highly concentrated is an article of faith, particularly in the ANC and in left-wing circles generally. The notion has even been endorsed to an extent by IMF and World Bank studies and goes unquestioned even among elements of professional and business groups.
This week, parliament’s economic affairs portfolio committee approved the new Competition Amendment Bill, to much acclaim. Its passing got me thinking about the notion of concentration, and the suppositions on which it is based. I’m suspicious because it is so at odds with my own experience of reporting on business in SA.
It also fits so neatly with Economic Affairs Minister Ebrahim Patel’s business-hostile orientation and his view that big, white business is deviously and maliciously preventing aspirant black business from emerging, and that this is the real crux of SA’s problems with high unemployment and stagnant economic growth.
I’m not an economist or expert on competition, but a quick examination of the data suggests the notion of “concentration” is either overstated or false. I wish someone would re-examine the factual premises more thoroughly and scientifically than I am able to. I might be wrong, but for what it’s worth, this is what I found.
The Competition Amendment Act is something of a misnomer; it is not an amendment as much as a wholesale revision of SA’s competition policy. The competition authorities will no longer be at arm’s length from the government when probing competition matters, but in effect a tool of the executive, free to swoop into the economy and investigate this terrible evil, “concentration”. It is, in effect, industrial policy by witch hunt.
If that is true, then the premise better be rock solid, otherwise we are headed for all kinds of anger and bile. Fortunately, the legislation is careful to justify this new innovation through scientific analysis.
In competition law, the widely accepted method of measuring concentration uses the Herfindahl–Hirschman index, sometimes called the HHI score. It is an elegant mathematical formula cited often in antitrust cases. In the prelude to the bill, nine industries are identified as “highly concentrated”, and their scores are tabulated. Also included is the average market share of a dominant firm in a defined product market within each sector.
One particularly caught my eye: financial services. My instinctive experience of the sector is that it is highly competitive. The past two decades have seen the emergence of two major new banking groups, and a host of new players of almost every description. The UK has seven major banks; SA has six. That’s pretty good for a small country like ours, one would think. More importantly, as far as I can see, there is no dominant firm that controls 68.8% of any meaningful part of the sector, as the legislation says very specifically.
The HHI-score is actually not that difficult to calculate. It is the sum of the squares of the market shares of the firms within the industry. So, at least as far as banks are concerned, we can do this calculation pretty easily.
SA'S ECONOMY IS NOT NEARLY AS ‘CONCENTRATED’ AS THE GOVERNMENT BELIEVES, AND EVEN IF IT WERE, THIS IS NOT THE WAY TO FIX IT
There are 20 or so registered commercial banks in SA, and it is generally accepted that the top six control 90% of the market. That seems pretty concentrated at first glance. But do the maths, and you get a figure of 0.1523. This might not be perfectly correct but it’s in the ballpark. I give Standard 21% of the market, Absa and FNB 19% each, Nedbank 14%, Capitec 11% and Investec 6%. That gets us to our 90% for the top six. I then give each of the other 14 banks just less than 1% each, and the result comes out to a score of 1,523 (usually, the result is multiplied by 1,000 for clarity). Reduce or add the number of small banks and the number really doesn’t change much.
A score of 1,523 is barely considered “moderately concentrated”. A score of below 1,500 is considered “not concentrated.” Yet the legislation claims the score for the financial sector is 2,788, almost double my figure.
How do they get to that number? It’s not explained in the legislation and nobody to my knowledge has questioned the calculation. But it is transparently wrong.
The disparity illustrates one of the problems with the HHI score; it depends a lot on what you consider the market to be. Shrink the market, and the numbers jump.
Another issue is, what are you comparing? The HHI score is widely used in developed markets, but is it really fair to compare the $19trillion US economy with the $350bn SA economy?