The South African economy looks uncomfortably the same to 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 more 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 value-added and more sophisticated products, a process referred to as structural transformation. There is still no sign that this is happening in South Africa.
In-fact, research conducted by the Industrial Development Think Tank has found that South Africa regressed between 1994 and 2016. The economy has become less diverse and it’s 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. 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 to other upper middle-income countries. For example, in 2016 high-technology exports accounted for only 6% of South Africa’s manufacturing exports compared to Thailand’s 21% and Malaysia’s 43%.
If South Africa continues on this path, it will struggle to create employment at the scale that is required. The majority of its population will continue to be excluded and the social fabric will continue to unravel.
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. Its 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 economic growth and to consumers’ pockets.
And the situation seems to be getting worse. Statistics South Africa data show concentration levels in manufacturing has 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.
Concentration is bad
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 gate keepers in exchange for minority shareholdings.
Broader agenda needed
A lack of progress towards increased participation is one of the justifications for amendments to the country’s 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 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.
Pamela Mondliwa, a researcher at the Centre for Competition, Regulation and Economic Development at UJ, coauthored this article.
When Eritrea gained its independence from Ethiopia in 1993, Ethiopia became landlocked and therefore dependent on its neighbours – especially Djibouti – for access to international markets. This dependency has hampered Ethiopia’s aspiration to emerge as the uncontested regional power in the Horn of Africa.
Recently, however, the ground has been shifting. As we point out in a recent article, Ethiopia has attempted to take advantage of the recent involvement of various Arab Gulf States in the Horn of Africa’s coastal zone to reduce its dependency on Djibouti’s port. The port currently accounts for 95% of Ethiopia’s imports and exports. It has done so by actively trying to interest partners in the refurbishment and development of other ports in the region: Port Sudan in Sudan, Berbera in the Somaliland region of Somalia, and Mombasa in Kenya.
But it is Berbera, in particular, that will prove the most radical in terms of challenging regional power dynamics as well as international law. This is because a port deal involving Somaliland will challenge Djibouti’s virtual monopoly over maritime trade. In addition, it may entrench the de-facto Balkanization of Somalia and increase the prospects of Ethiopia becoming the regional hegemon.
Ethiopia’s regional policy
Ethiopia’s interest in Berbera certainly makes sense from a strategic perspective. It is closest to Ethiopia and will connect the eastern, primarily Somali region of Ethiopia to Addis Ababa. It will also provide a much needed outlet for trade, particularly the export of livestock and agriculture.
The development and expansion of the port at Berbera supports two primary pillars of Ethiopia’s regional policy. The first is maintaining Eritrea’s isolation. The aim would be to weaken it to the point that it implodes and is formally reunited to Ethiopia. Or it becomes a pliant, client state.
The second pillar rests on maintaining the status quo in post-civil war Somalia. Simply put, a weak and fractured Somalia enables Ethiopia to focus on quelling persistent internal security difficulties. It also keeps up pressure on Eritrea.
Ethiopia’s ambitions for Berbera have been hampered by two problems. Firstly the Republic of Somaliland – a de-facto independent state since 1991 – still isn’t recognised internationally. This makes engagement a political and legal headache. Secondly, Ethiopia, doesn’t have the critical resources needed to invest and build a port.
Ethiopia had been trying to get Abu Dhabi and Dubai interested in the Berbera Port for years. It’s latest push was assisted by a number of factors. These included a shift in the UAE’s military focus in Yemen and Ethiopian assurances of more trade and some financing to upgrade the port.
Ethiopia’s diplomatic push – which coincided with developments across the Gulf of Aden – finally got it the result it craved. In May 2016, DP World, a global mega-ports operator, signed an agreement to develop and manage Berbera Port for 30 years.
The Berbera Port deal
It is unlikely that DP World would have signed the deal if it didn’t see some long-term commercial benefit. The deal also includes economic, military and political dimensions.
Economically, for example, there will be investments in Somaliland’s fisheries, transportation and hospitality industry. The UAE will also establish a military installation in Berbera. The base is intended to help the UAE tighten its blockade against Yemen and stop weapons being smuggled from Iran.
Politically, the Berbera Port deal has provoked mixed reactions in Somaliland. There has been some popular anger aimed at Somaliland’s former president, Ahmed Mohamed Mohamoud aka “Silanyo”, and his family who reportedly benefited personally from it. Anger also stems from inter-clan and sub-clan rivalry over land, particularly in the Berbera area.
But the anger in Somaliland pales in comparison to the reaction in Mogadishu. This is because the Somaliland government has remained largely isolated internationally – until the port deal.
Somalia Federal Government ministers have publicly challenged the right of Somaliland to enter into official agreements with any country. The Ethiopian-driven deal means that Mogadishu’s claims over the breakaway territory have weakened substantially. The deal means that Somaliland has partially broken the glass ceiling of international recognition by entering into substantive deals with viable business partners and states operating on the global stage. Mogadishu can no longer pretend it controls the government in Somaliland’s capital Hargeisa.
The bottom line is that Ethiopia has engineered access to another port and enhanced its security and strategic economic interests. With the growth in annual volumes of transit cargo, Ethiopia has, for a long time, needed alternative routes from Djibouti.
In addition, Ethiopia has ensured its presence in the running of the port by acquiring a 19% share in the deal.
And by wangling a legally binding agreement between Somaliland and another state, Ethiopia has potentially paved the way for eventual international recognition of Hargeisa.
Ethiopia has also further cemented its hold over Somaliland through a combination of pressure and material incentives. By bringing significant outside investment and recognition, Ethiopia can also increasingly meddle in its internal affairs. This is a conundrum for Hargeisa. It finds itself increasingly emboldened to act independently. Yet it remains constrained by the need to get Addis Ababa’s approval.
As Ethiopia begins to move increasing amounts of goods and services on Somaliland’s new highway to the refurbished port of Berbera, Hargeisa may begin to question key aspects of the port deal.
But one aspect will not be in question: Ethiopia’s rising power and influence over the entire region.
Brendon J. Cannon, Assistant Professor of International Security, Department of Humanities and Social Science, Khalifa University and Ash Rossiter, Assistant Professor in International Security, Department of Humanities & Social Science, Khalifa University