Why the dominance of big players is bad for SA’s economy

Talk of radical economic transformation in South Africa requires a second look if it is to deliver the goods. While the concept has assumed varying definitions in recent times, it’s generally accepted as representing a push for structural change of the post-apartheid economy in a way that creates space for the black majority to participate fully.

But the idea is missing a critical element – policies to break up historical monopolies and oligopolies and make space for emerging small to medium sized economic players. To fix this, the country needs to make micro-economic policy adjustments – that is, it must remove distortions and imbalances in various sectors of the economy.

The political winds of change blowing through the country, as represented by the ascension of Cyril Ramaphosa to the presidency, offers a window to address the current policy gaps.

There is no doubt that the South African economy requires radical transformation. Income and wealth inequalities persist and the domination of the mainstream economy, and key industries, by a few big businesses continues to hold back inclusive growth.

Ramaphosa acknowledged this in his widely appreciated state of the nation address. But even his spirited re-commitment will fail if it neglects the competition issues. The country needs to introduce policies that break down the old, and persistent patterns of dominance as a matter of urgency.

The microeconomic challenge

Good macroeconomic policies – the levers used to stabilise the economy such as managing inflation and financial markets – are necessary. But they aren’t enough to address South Africa’s anaemic economic growth and the debilitating unemployment challenges.

The government has to get its hands dirty by tackling issues on the microeconomic list. At the very top is unbridled concentration in the economy. This has to be tackled head on if the country is going to turn the corner and ignite entrepreneurship, innovation and shared economic growth.

Huge sections of the economy are extremely concentrated. This shrinks the space for successful entrepreneurship and job creation.

Ramaphosa did note, late last year, that for most black people:

there was very little space to play so they bought up shares in existing companies and became appendages. Competition policy should open up the space so that new companies can be created.

But the problem is bigger and more complex. The basic economic logic is that the higher the number of independent businesses operating in any given industry, the lower the possibility of abuse of market position by a dominant player or a few key businesses. In turn, this reduces the chances of collusion.

There is also evidence that over-concentration tends to impede job creation.

But breaking these patterns isn’t easy. The enormity of the task can be seen in the Competition Commission’s efforts to reign in some of the dominant players in key industries, like food and infrastructure development.

High levels of concentration

Consider the financial sector. The country only has a handful of financial services companies controlling it entirely.

The banking sector is ruled by five players. Four of them account for 90% of the banking sector’s asset base. On top of this the major banks also own many of the fund managers that control the unit trust industry. The banks are also connected to the insurance players through their holding companies.

The insurance industry itself is dominated by five insurers, which account for 74% of the long-term insurance market. And the seven largest fund managers control 60% of unit trust investments under management.

In the mobile telephony market, three main players in an already small field control 96% of the subscriber base. It’s therefore no wonder that voice and data costs are among the highest in Africa.

Impediments to successful entrepreneurship

Efforts to encourage people to be entrepreneurial won’t work if key markets remain highly restrictive. For example, why shouldn’t it be possible for artisans in rural areas to produce some staple goods for their local markets? Why shouldn’t it be possible for a grandma, or any person for that matter, in rural Transkei or a township to bake bread and sell to the local community?

It should also be possible for a dressmaker or tailor to set up shop and produce school uniforms for scholars in the local community. Why should a big factory in Pretoria or Cape Town produce school uniforms for scholars in rural areas hundreds of kilometres from the city?

This isn’t happening because emerging entrepreneurs face high barriers to entry in the form of regulatory regimes, cost advantages that have accrued to incumbents over the years that cannot be easily duplicated by new and small players, as well as capital requirements, among other things. The domination by a handful of players in sectors emerging entrepreneurs want to break into, and covert anti-competitive pricing behaviour, together constitute a formidable barrier.

Community-based income generating activities could be supported with deliberate government policy and action, such as affirmative procurement and set asides, to spur on township and rural economies. A critical mass of these rural and township-based economic activities could generate jobs and incomes.

What has to be done

The role of the Competition Commission needs to be redefined and strengthened. The institution requires additional resources to tackle head-on the insidious anti-competitive behaviour associated with almost all the major industries in the country.

A blanket aggressive effort by the Competition Commission to intervene and break up oligopolies may be unwarranted. But a thoughtful (and urgent) case-by-case study of the industrial landscape is required. The questions that need answers include:

• What has accounted for the concentration?
• Is it product or market innovation?
• Is it as a result of the historical legacy of isolation due to the existence of the apartheid regime?

The responses should inform what remedial action needs to be taken.

Other regulatory institutions can also play a role. For instance, the Reserve Bank can make it easier for new players to enter into the financial services sector. This has happened in countries such as Kenya and Ghana, where mobile money transfers have emerged as major businesses alongside the formal banking sector. Vendors have sprung up in every nook and cranny of these countries, expanding financial inclusion and creating jobs.

Lastly, there should be a deliberate government policy to ring-fence certain markets for small scale businesses, particularly in the rural areas and townships.

Matthew Kofi Ocran, Professor of Economics, University of the Western Cape

This article was originally published on The Conversation. Read the original article.