The complications of economic concentration are growing

The world’s leading central bankers and economists meet each year in the US resort of Jackson Hole, Wyoming, to ponder the difficult issues facing monetary policymakers. This year’s meeting was the first public outing for new US Federal Reserve chair Jerome Powell. It was his speech that got much of the airtime — and briefly prompted a rally of sorts in the rand, which lifted along with other emerging-market currencies after Powell’s comments affirming the Fed’s commitment to gradual interest rate hikes weakened the dollar. There was less coverage of other, more academic discussions, but one area of focus which is of some interest for SA was the issue of economic concentration and what it might mean for monetary policy.

Many of SA’s economic sectors are highly concentrated in the sense that they are dominated by just a few players. Economists have cited the high degree of concentration as a factor in SA’s low growth and employment rates, pointing to the relative dearth of the small and medium enterprises that in other emerging markets drive job creation and innovation. Economic development minister Ebrahim Patel has tabled legislation in parliament that aims to tackle high levels of economic concentration by giving the authorities enhanced powers to probe sectors with concentrated market structures, in a bid to open up these markets to smaller, particularly black-owned, businesses.

Economic concentration has become a big issue in the US and other advanced markets too but in a very different way. There, regulators are increasingly preoccupied with the market dominance of Facebook,

Amazon, Apple, Netflix and Google, and what it means not only for competition but also for democracy.

For one thing, market dominance may keep smaller players out, but that doesn’t necessarily mean higher prices for consumers — as the

“Amazon effect” suggests. The impact of the pricing power of online retailers, particularly Amazon, in putting the lid on prices and therefore helping to keep inflation low is one of the themes monetary policymakers and central bank economists have been watching for a while. But there was a fair bit of media attention given to a paper by

Harvard Business School economist Alberto Cavallo on how the

“Amazon effect” could affect inflation dynamics. He pointed to the high-frequency nationwide price changes, driven by algorithmic pricing, which are now a feature not only of online shopping but also increasingly of the big bricks-and-mortar retailers such as Walmart. The effect could be, he argued, that shocks such as an oil price change could impact the inflation rate much more quickly than before.

But if dominant players might keep prices down the same might hold for wages — which is one reason why even though the US unemployment rate is at an enviably low 3.9%, real wages are not rising, and monetary policymakers in the US have been wondering whether the traditional notion still holds that when the economy is at full employment, inflation is sure to rise and it’s time to start hiking interest rates aggressively.

Last week’s discussions also raised the issue of how effective interest rates can be, given that the investment spending that matters now in an economy like the US is in intangible intellectual property and brands, and borrowing costs don’t matter that much for this.

For SA , many of these issues seem far away. Online shopping is only starting to take off. And it certainly seems as if weak competition and high levels of economic concentration make for more rigid prices and wages, all of which contribute to SA’s structurally high level of inflation. But the world is changing and SA with it. Patel and the competition authorities must take a nuanced and evidence-based approach to concentration, balancing consumers’ need for lower prices with the need for transformation and job creation. It’s one to watch for SA’s central bankers.

Competition authorities must take a nuanced and evidencebased approach