Category: public policy

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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
inequality political economy public policy Vision 2030 youth entrepreneurship

This nation

You’re gonna burn out all my love
I keep telling you
How you bruised my heart 
Keeping me holding on too long
(Sipho ‘Hotstix’ Mabuse)
Last week, as I was about to be interviewed on a radio show about an issue of competition law, I received a frantic sms from the producer. The show is running 30 minutes late. She is overwhelmed. And close to tears. It turns out that the subject under discussion before I was about to go on the talk show was rape in South Africa, in the wake of the brutal rape and murder of Anene Booysen. The nation is outraged, broken and once again, at a loss for words.
The past few months have reminded us of our brokenness, our demons and our fault lines. But we didn’t learn anything new about our nation. Femicide, violent protest, corruption – I could go on – these are things we know about ourselves already.
The show must go on. And so the producer informs me that the host will talk to me after the news. The news is followed by a commercial break. Then the very talented and gracious radio host helps us all transition from brutal crime to corporate corruption. That’s how we roll, how’ve learnt to roll, from crisis to crisis.
*
The show must go on. The presidential motorcade winds down Adderley Street. It’s a good show. Red carpet. Military guard of honour. Black-suited men dashing out of big black cars. For a night, the political divide gives way to the afrochic/ball-gown divide.
You’re gonna burn out all my love. Our military band is full of surprises.
You’re gonna burn out all my love, Sipho Hotstix Mabuse sang in the 1980s. The country was on fire. But we danced to Hotstix, and Chaka Chaka and Fassie and Stimela. I listen to that music today, that soundtrack to the eighties that we dismissed as bubble-gum, and it’s hard to discern the pain buried therein. You have to listen closely. The show must go on. We danced then. We dance today.
The 21 gun salute. No-one really wants to talk about guns today. I’m afraid that, unlike the praise singer, pelo ya ka ha e monate.
*
As the presidency announced earlier this month, this is the first state of the nation speech delivered within the context of the national development plan. The plan will tackle poverty, inequality and unemployment. The head of state rattles of goals that we aspire to. But he acknowledges that we will not achieve the good life, as defined by government, with our tepid Mzansi economic growth rates.
There is a need to engage the social partners for solutions. This is the kind of rhetoric that drives people straight into the arms of authoritarian populism.
I’m not a hater. Concrete projects are mentioned. Power stations, dams and ports are being built. It’s not all tuck shops and rural lifestyle estates, you see. Like, I’m talking about 860 billion Rands. ‘Nuff said, some might think.
I’m really not a hater. Like those people that routinely criticise the speech of being short on detail. It’s a one hour (or thereabouts) speech. Get over it. Go read some policies and annual reports.
There are some recurring ideas and policies. I suppose that is the challenge. The commander-in-chief can keep presenting the nation with new, lofty plans every year or keep plugging at the same general framework, pushing for implementation. And so we learn that some discussions have been concluded on the issue of incentives for youth employment. An accord will be signed later this month. We wait with bated breath. This enterprise is a follow up from the 2010 state of the nation. Other familiar ideas to tackle unemployment include boosting the tourism sector and the expanded public works programme. These are solid ideas, with tireless officials behind them. But there’s the question of impact. There’s an assurance that this programme of action will be implemented differently as departments are expected to align themselves with the National Development Plan.
There are newish ideas that also deserve a chance. The Nationa Health Insurance pilot is such an idea. What’s the point of debating this idea in abstract when sensible experimentation might yield some interesting results? Keep it real, keep it fact-based, and something special might emerge.
*
The account of the Marikana moment leaves me bewildered. What did I expect? Outrage, even longer pauses, eyes off the page?
We are told that there is policy certainty in the mining sector, mostly because the nationalisation debate was laid to rest late last year. Reports from the recent Mining Indaba paint a less reassuring picture. Anyway, it has been determined that a suitable tax policy is the solution to our mineral resource management woes. Perhaps this is what I love most about this nation. After a few years of vexed debate, bringing us to the brink of serious strife, we find our way out of the mess in the tax code. I just wish we could skip the part where we flirt with the edges.
*
You’re gonna burn out all my love. Or not. There’s hope. Like Hotstix achieving his matric certificate at 60.
I’m done with my armchair dissing. This is what I’m fighting for this year: fair, efficient and inclusive markets in our economy.
I might burn out all my love. I probably won’t. The show must go on.
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
enterprise development public policy small business

Small business financing update

Business Day reports that the state has allocated R2 billion to small business financing over the next three years. This will be channeled mainly through a subsidiary of the Industrial Development Corporation called the Small Enterprise Financing Agency boosted by lending from the China Development Bank. It will be interesting to see how small business financing fares within this new agency .

Business Day article

Categories
barriers to entry competition enterprise development public policy

The intersection between competition policy and entrepreneurship

In the latest edition of the Competition Commission’s newsletter, Principal Economist Trudi Makhaya has penned an article on the role that competition policy can play in supporting entrepreneurship. Some extracts:


The South African economy is characterised by high levels of concentration in many sectors and, compared to other developing countries, low rates of new business formation.  This apparent lack of competition and dynamism is often attributed to various factors, most notably the size of the local market and the legacy of state-centred, protectionist apartheid capitalism.


The Fair at Madrid, Francis Goya 1779.
Oil on canvas  258 X 218cm.
Prado Gallery, Madrid, Spain.
The National Planning Commission and the Development Bank of South Africa, to name just two institutions, have placed entrepreneurship and new business formation back on the agenda as forces for capability development, employment generation and economic growth. Current thinking in South Africa has emphasised access to finance, skills and economic infrastructure as the major obstacles to the formation and durability of new businesses. 

The structure of the economy and the nature of rivalry and power dynamics in the market have not been paid as much attention in addressing the entrepreneurship challenge.

One of the purposes of competition policy in South Africa, as articulated in section 2 (d) of the Competition Act 89 of 1998 (as amended), is to “ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy.” Read in conjunction with other parts of section 2 which call for the promotion of efficiency and adaptability of the economy, as well as a greater spread of ownership in the economy, it can be argued that this legislation takes a positive stand in favour of economic freedom and entrepreneurship.

This is not unusual. For instance, the Competition Commission of Singapore sees its role as encompassing the protection of the competitive process, as it is this process that “allows new businesses to enter and existing competitors to develop new ways to compete in a market.” The interaction between customer choice and business responsiveness to those choices is seen as the basis for innovation, efficiency and improvements in productivity and quality. The roots of US anti-trust can also be found in the desire to limit the ability of conglomerates to act anti-competitively towards their competitors and suppliers.

In linking competition policy to entrepreneurship, it is especially useful to examine the pervasiveness of barriers to entry and exit across the economy. The level and intensity of competition within a market is closely associated with the nature of barriers to entry and exit in that market. New entry has been defined by the OFT as a “situation in which both a new undertaking is established in the industry and that new productive capacity is set up in the industry”.  Entrants into an industry can be expected to drive down profits towards their long run competitive level and also bring innovation and dynamism into the market. Barriers to entry and exit limit both allocative and dynamic efficiency. 
   
Where an industry includes a profitable, super-dominant firm, it is expected that there may be some barriers to entry that protect this firm from the entry of potential rivals, and also that it will have an incentive to heighten those barriers through its conduct. 

Where entry occurs, various strategies are available for a super-dominant incumbent to push the entrant completely out of the market or to prevent it from expanding (or to consign it to a niche in the market). Such strategies include conduct that raises rivals’ costs or reduces rivals’ revenue.  Cartels also have the effect of preventing new entry into markets, as cartelists have an incentive to make sure that their collusive profits do not attract “disruptive” entry.

Within the South African context of concentrated industries, some with super-dominant firms, and given expectations about the incentives and behaviour of incumbents and in light of the practices that have been revealed through the Competition Commission’s enforcement practices, the intersection between competition policy and entrepreneurship becomes very important. Competition policy has a bearing on the climate for entrepreneurship as it is a tool for challenging abusive and restrictive practices that stifle entrepreneurship.

The competition authorities explicitly dealt with this nexus between competition policy and small business in Nationwide Poles (case number 72/CR/Dec03). In this case, Nation Wide Poles, a small pole manufacturing firm complained that Sasol did not supply it with a key input on the same terms as its larger competitors. The Competition Tribunal argued that the Act had the development of small business in mind, as demonstrated by its preamble and, looking back in time, the explanatory memorandum that accompanied it. The “special treatment” accorded to price discrimination, with its own section separate from other abuse of dominance provisions, is also seen as reflecting legislative concern with maintaining accessible and competitively structured markets in which entrants can compete effectively against incumbents.  

Though the Tribunal did not succeed in its particular use of the public interest arguments in favour of small business in Nationwide Poles (where it was arguing for a different standard of showing substantiality where a small business is harmed), its remarks about the potential of competition law to contribute to an enabling environment for small business development have merit. The Competition Appeal Court was careful to make it clear that its decision did not seek to diminish the ability of small and medium businesses to “use the Act to protect their ability to compete freely and fairly” (case number 49CACAPRIL05).

Though entrepreneurship and small business development have not been invoked explicitly in most of the competition authorities’ decisions, it is clear that the proximate victims of exclusionary and abusive conduct in many cases have been entrants and small enterprises.

In applying its prioritisation framework, the Commission already takes into account conduct that retards small business development and entrepreneurship, such as cartelisation. It is expected that this approach should go some way towards addressing obstacles to entry and expansion that arise from anti-competitive conduct. 

The Commission’s prioritisation framework also calls for the consideration of the nature of barriers to entry in an industry in making screening decisions. In this way, competition policy can be supportive of the broader entrepreneurship policy agenda, especially as it relates to the ability of   ability of small, independent or specialist firms to bring innovation, choice, and dynamism to the market, with long term benefits to consumers.



Link to the full article and newsletter
Image Source: WikiPaintings