How to get the best out of SA

PAMELA MONDLIWA

THE South African economy looks uncomfortably like 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 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 valueadded and more sophisticated products, a process referred to as structural transformation. There is still no sign that this is happening in South Africa.

Research by the Industrial Development Think Tank found South Africa regressed between 1994 and 2016. The economy has become less diverse and 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.

SIMON ROBERTS

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 with other upper middle-income countries. In 2016 high-technology exports accounted for only 6% of South Africa’s manufacturing exports compared with Thailand’s 21% and Malaysia’s 43%.

If South Africa continues on this path, it will struggle to create employment on the scale required. The majority of its population will continue to be excluded. 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. It is 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 growth and to consumers’ pockets.

And the situation seems to be getting worse. Statistics South Africa data shows concentration levels in manufacturing have 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.

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 gatekeepers in exchange for minority shareholdings.

A lack of progress towards increased participation is one of the justifications for amendments to the 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

RIVALRY SHOULD BE ENCOURAGED IN ALL SPHERES OF THE ECONOMY TO SPUR COMPANIES INTO IMPROVING THEIR PRODUCTS AND BUSINESS MODELS AND BRINGING IN NEW PRODUCTS ,WRITE AND

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 Conversation

Pamela Mondliwa is a researcher at the Centre for Competition, Regulation and Economic Development at the University of Johannesburg.

Simon Roberts is a professor of economics and director of the Centre for Competition, Regulation and Economic Development, University of Johannesburg