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competition policy economic policy inequality public policy

Competition policy and poverty reduction

Long version of my article published in today’s Business Day

At this year’s OECD Global Forum on Competition held in Paris recently, the main topic of discussion was the relationship between competition policy and poverty reduction. This proved to be a timely discussion, with submissions from over 20 countries and various regional organisations, including South Africa. In its recent report on South Africa’s economy, the OECD also highlighted lack of competition in product markets as a serious impediment to our country’s economic growth prospects.
Discussions of the relationship between competition law and other government policies are viewed with scepticism by those who seek to confine competition law to its most narrow interpretation. Yet, as the South African submission noted, competition policy emerges out of a particular context.
To borrow a phrase from modern political economy, the development and implementation of competition policy can be viewed as an exercise in ‘embedded autonomy’. This describes a relationship between state institutions and society whereby the state is embedded adequately in society so as to be responsive to society’s needs, but also autonomous from narrow private interests. 
This formulation can be applied to the experience of competition authorities, as they seek to contribute to the resolution of society’s most pressing challenges, such as poverty, whilst taking care not to be overladen with policy goals beyond what is achievable in the realm of competition policy. Embedded autonomy also implies that competition authorities construct their enforcement and advocacy agenda in alignment with society’s priorities; doing so in a transparent, rigorous and impartial manner.
Poverty in South Africa continues to be marked by race, gender and geography; with black, female-headed and rural households experiencing the highest rates of poverty and economic vulnerability. The labour market is also not integrating young people effectively, thus increasing rates of youth unemployment. To develop the capabilities required to transcend poverty, access to opportunity is key.
Sustainable poverty reduction depends on generating wage-earning opportunities in the economy. Competition policy, to the extent that it challenges economic exclusion, lack of innovation and lack of rivalry can play an important role in placing the economy on a higher growth and development trajectory.
Lack of competition in product markets for essential goods and services is arguably more harmful for poorer households than for higher income households. Poor households spend a higher proportion of expenditure on essential goods and services.
The stated purpose of the South African competition law encompasses orthodox concerns related to efficiency, prices and choice. The statute also articulates the purpose of the Competition Act as promoting competition in order to realise goals related to employment creation and retention, equitable participation in the economy by small and medium-sized enterprises, a broader and more racially diverse spread of ownership and international competitiveness. 
These elements of the legislation ultimately relate to the government’s economic, development and social policies. Specific provisions dealing with the assessment of mergers and exemptions include public interest considerations related to socio-economic development and international competitiveness.
The Competition Commission’s enforcement and advocacy activities are guided by a Prioritisation Framework, which represents the organisation’s over-arching strategy. This Framework, adopted in 2008, and soon to be updated, directs the Commission to intervene in sectors of the economy that have a significant impact on low income consumers and that determine the enabling environment for business and economic development. The framework is located within the context of the policy focus on labour-absorbing growth to address the high unemployment and poverty levels in South Africa.
Current priority sectors for enforcement and advocacy are namely; food and agro-processing; infrastructure and construction; intermediate industrial products and energy; construction services; and banking.
Proactive measures taken by the Commission in priority sectors include reviewing available information and evidence on potential anti-competitive conduct and screening various markets for signs of potential anti-competitive outcomes. This has assisted the Commission in initiating and in some instances concluding investigations in key consumer and input markets such as poultry, bread, wheat and milling, animal feed, steel, polymers, fertiliser, cement, concrete pipes and bricks. It also resulted in an increase in the number of abuse of dominance investigations.

By focusing its energies on identified priority sectors selected on the basis of criteria that include impact on poor households (and industrial development with implications for employment), the Commission has been able to optimise on its resources whilst also contributing towards poverty reduction.

However, the transition from a highly concentrated economy to a more competitive one creates winners and losers. Entry by new domestic players or multinationals disrupts supply chains and displaces old modes of production. These dynamics may benefit the poor as consumers, through lower prices, but there are instances where, at least in the short term, intensified competition seems to displace the poor.
The competition authorities have dealt with these concerns through conditions limiting employment losses and other remedies, such as the establishment of supplier development mechanisms.
The extent to which the South African competition authorities can interpret their mandate and legislation in favour of poverty reduction remains a matter of contestation. What is clear is that effectiveness of competition policy as an instrument for inclusive, employment-generating growth depends on effective policies in areas such as access to finance, training, research and development to eliminate other constraints to employment creation.

Trudi Makhaya is the Divisional Manager for Advocacy and Stakeholder Relations at the Competition Commission.


Categories
barriers to entry competition competition policy

Developments in competition policy – construction & other matters

Zandile Mavuso of Engineering News has published an article on various development in competition policy, including the ongoing ‘construction fast track process’ aimed at resolving cartel conduct in this industry, the Competition Commission’s strategy development process and international relations. Some extracts from the article and a video interview:

Makhaya states that competition law plays an important role in stimulating economic growth, development and employment creation.

“Competition law is crucial in supporting other policies set by government, as the law has the ability to transform different sectors by instilling the rules that promote fair competition. By advocating for competition and investigating anticompetitive conduct in different sectors, we will be able to promote economic growth,” she adds.

The commission is looking forward to its next strategic planning phase, when it will engage with stakeholders on work completed by the commission and find ways in which to improve. The commission also hopes that the planning phase will foster the identification of other sectors that require scrutiny in terms of competition law, in addition to the current priority areas.

The commission states that anti- competitive conduct is an international problem, which has caused welfare deficits in many countries. Therefore, the commission is actively involved in the African Competition Forum, an informal association of competition agencies across the continent, which it hopes will assist the countries to develop ways to eliminate anti-competitive conduct.

Article link

Categories
competition policy public policy

The possibilities of competition policy

Over the past few months, calls have made for the Competition Commission to investigate government’s financial policies towards state-owned entities (SAA and the African Exploration Mining and Finance Corporation). In a piece published today in Business Report, I distinguish between what the competition authorities can achieve in their prosecution role (investigate and prosecute anti-competitive behaviour) versus issues that go beyond that into the realm of competition policy as practised by government in general. A longer version of the article follows below:
South Africa’s gradual shedding of the legacy of a highly concentrated, racially exclusive and calcified apartheid economy is aided by the enforcement powers of the competition authorities. The cases that the Competition Commission has brought before the Competition Tribunal have not only exposed and penalised prohibited anti-competitive behaviour by firms, they have also introduced an awareness of the role of competition as the driving force of a market economy. 
Over the past decade or so, the competition authorities have scored well publicised triumphs such as the prosecution of the cartels in the bread value chain. The authorities have also taken on anti-competitive behaviour by state-owned enterprises such as SAA and Telkom. As a consequence of this enforcement record, the dominant discourse that has developed around the work of the competition authorities revolves around ‘crime and punishment’.
This discourse limits the role of competition policy to that of enforcement. Yet the scope of enforcement is bounded by two important factors. One relates to the nature of South African competition law, which reflects the context in which it was crafted. The second relates to the broad range of factors that may create impediments to competition, some of which have little do with firm behaviour and more to do with the construction of markets.
Recall that our law is the outcome of negotiations between labour, government and business at NEDLAC. What emerged is a statute that is very specific as to what constitutes anti-competitive conduct as it pertains to collusion, restrictive practises and abuse of dominance; and how such conduct is to be investigated and proved.
Competition law is agnostic as to size, market share or ownership. Being big, dominant or state-owned (and financed) matters not; what matters is how a firm actually behaves in markets capable of competition and in regulated markets where the commission has concurrent jurisdiction.
But it’s not a simple matter of the law being very prescriptive on the authorities’ mandate. There are circumstances in which competitive markets do not function optimally due to deficiencies such as natural monopoly, externalities or information asymmetries. And government actions can sometimes contradict competition goals. These are not matters that can be cured by traditional competition law enforcement tools.
In the case of natural monopoly, where it is not economically feasible for there to be more than one supplier of a good or service, regulation is required to ensure that a firm that enjoys such an advantage does not exploit its power at the expense of consumers. Where regulation is weak or incomplete, it is natural to turn to the competition authorities to restore competition. This is not the best solution because it may be the case that the monopoly in question has not contravened the law. 
Even in cases where a regulated firm has contravened the law, prevention is usually better than cure. It is less damaging to the economy to regulate markets proactively to prevent competitive harm, rather than tolerating a regulatory climate that allows regulated firms to undermine competition.
Economic policy in South Africa recognises the important role that competitive forces play in keeping prices down and encouraging innovation. Nonetheless, government actions may also introduce distortions that skew the competitive landscape by creating barriers to entry in a market or bestowing advantages on a state-owned enterprise that are not enjoyed by its commercial rivals. These competition distorting actions often reflect policy decisions that are taken in pursuit of other socially desirable outcomes, such as maintaining safety standards or pursuing a universal access model that requires soft financing.
Such policy actions by the state do not fall foul of any particular provision of the competition law though they may create rules of the game that are unfair. The competition authorities do not have the mandate to prosecute these rules of the game. What they do have is insight into market dynamics and expertise that could be tapped by other government institutions to enable the pursuit of social aims in pro-competitive ways.
In this regard, the Competition Commission may not have the power to challenge a decision legally, but it has the opportunity to play the equally compelling role of advocating for competition as an important economic and social value. 
Competition authorities around the world are tasked with this advocacy role as they can usually execute it in an independent manner.  Success varies, depending on circumstances and resources. To cite an ambitious example, in the wake of the Eurozone crisis, the Italian competition authority reviewed major government policies and legislation, with the aim of strengthening competition. It advanced 50 recommendations for reforms covering major economic sectors, some of which were enacted into law.
By the nature of the work that they do, competition authorities catch sight of broad competition challenges that affect entire value chains and that call for remedial policy or regulation. The unintended consequences of government policy on competition also come to light. Through advocacy, competition authorities seek to advance the cause of competitive markets using non-adversarial methods. In doing so, they cannot victimise entities that have not contravened the law but happen to be beneficiaries of government policy or malfunctioning markets.
South Africa needs robust competition policy implementation, which includes pro-competitive regulation and pro-competitive state action in the economy, where appropriate. It is encouraging that the commission is increasingly being consulted by government institutions as they contemplate policies and actions that have implications for competition. In the face of systemic market imperfections, these processes of policy dialogue and reform hold the key to developing and entrenching a culture of competition.

Categories
competition policy wealth youth entrepreneurship

Merger control in Africa…and other links

I’ve spent the past few days at Oxford University in the UK, taking part in alumni weekend activities. Oxford is amazing in the spring, just before the start of the academic year. I attended various functions across the university. At the SBS business school events, I was struck by the increasing number of MBAs and other alumni who are setting up enterprises in Africa. It’s good to see that the continent’s opportunities are attracting global talent.

The Financial Times ‘BRICS’ blog carries a piece by lawyers from a South African law firm that points to some of the regulatory issues that investors into Africa have to take into account, specifically merger control. Regulation in African economies is becoming quite sophisticated, and it would be dangerous to assume that deals on the continent do not require the same degree of analytical rigour that is applied in entering other markets. The authors express support to a regional approach to merger control, though it would not supersede national merger control regimes. The emergence of the African Competition Forum is one development that would allow for the sharing of knowledge and tools across competition authorities on the continent:
http://blogs.ft.com/beyond-brics/2012/09/19/guest-post-african-regulators-get-to-grips-with-ma/#axzz276itO1vJ

The African Development Bank’s economic outlook for the continent was released this month, with a focus on youth employment. The report does not lament youth unemployment, but proposes policies to reap the potential demographic dividend presented by the continent’s growing youth population:
http://allafrica.com/stories/201209191071.html

I recently watched an MTV Base production featuring a group of young African stars interviewing the Nigerian billionaire Aliko Dangote. One of the interviewers asked Dangote to respond to allegations that he exercises monopoly control in the industries that his companies operate in. Dangote responded by arguing, essentially, that the barriers to entry in these industries (sugar, cement, flour) are low and that anybody is free to enter those markets. Interesting question, interesting response. Forbes reports that Dangote is stepping up his philanthropy, inspired by the Buffet and others (video):
http://www.forbes.com/sites/luisakroll/2012/09/18/africas-richest-person-aliko-dangote-on-why-hes-stepping-up-his-philanthropy/

Ventures Africa reflects on the South African Rich List. Once again, the Sunday Times places Motsepe at the top. Once again, this list diverges from Forbes, which rates Oppenheimer as the richest South African:
http://www.ventures-africa.com/2012/09/billionaire-patrice-motsepe-remains-south-africas-richest-man-as-rich-list-wealth-grow/