Editorial: Demolish racketeering
Apartheid’s economy has been built on cartels; that culture of collusion and criminality has left the deep structure of the siege years in place.
Hard work by the competition authorities has begun to chip away at this edifice of boardroom corruption, but until recently, it had not had nearly a broad enough impact. That may be changing, with the revelation of what looks like blatantly criminal conduct in the construction sector, but public understanding and
political focus on the problem are still limited.
We know about the public money wasted on over-priced stadium and infrastructure projects and the literal theft of bread from the mouths of consumers, but the consequences are graver still and the economic impact broader.
As research commissioned from the “Harvard Group” of economists by the national treasury and published in 2006 clearly showed, South African manufacturers are consistently able to charge mark-ups far higher than their international peers. Among the listed firms, profitability margins were twice as high here as in comparable markets and showed no signs of declining.
Modelling showed a clear link between these elevated mark-ups and some of the most important drivers of economic success. “Higher past mark-ups are associated with lower productivity growth rates and lower current employment”, a paper by Harvard and University of Cape Town economists said.
Prices pushed up by collusion, concentration and the abuse of dominance. They keep out new players, limit investment in productive capacity and choke off job growth. Cartels, in short, are making us all poorer.
BEE could help shake up things
In a separate paper by members of the same team, the argument is presented that black economic empowerment could help to shake up this cosy environment. Too often, however, it has simply meant giving well-connected players a place in the sun and an
interest in procuring political cover in return. Indeed, during the decade to 2006, big companies became more profitable relative to small ones, not less so.
Of course, the timing of the latest revelations is difficult for big business. Relations with government and the ANC are fraught and the economy is fragile. On the other hand, the cancer is so deep that any attempt to destroy it at a stroke would seriously endanger the life of the patient.
A government that has trillions in infrastructure spending planned will have to calibrate carefully any moves against the construction industry. The answer, clearly, is not a bigger role for state companies. We had plenty of that before 1994 and know first-hand its anti-competitive effects. We are still living with them in privatised state firms and in the remaining parastatals.
But some very real and serious pain is clearly in order. For the first time, it looks as if criminal charges against top executives may spring from a cartel investigation. That may complicate the competition case, but if fraud has been committed, it is hard to argue against. And the fines should be immense.
Bigness has its place in any economy. It can be won by fair means and it can be deployed in beneficial ways. But being open for business does not mean being supine before the gangsters in suits. Only when the protection rackets take their hands off the throats of the economy will we get the jobs, growth and productivity that we so urgently need.