/ 2 December 2011

Vision 2030: What’s needed

Vision 2030: What's Needed

Vision 2030, the plan released by the National Planning Commission, presents a vision of a South Africa in which mass entrepreneurship is possible. In its proposals on the economy and employment the plan expects that small and expanding firms will produce 90% of the new jobs that are required for the achievement of full employment. This is premised on the creation of an environment that is conducive to business entry and expansion.

Although the focus is on removing the regulatory obstacles hindering entrepreneurs, it assumes that incumbent firms in concentrated markets cannot protect their positions against new challengers. For the plan to succeed it implies a positive understanding of competition as the ability to enter and compete effectively, where effort and creativity is rewarded rather than an inherited incumbency.

This raises a much wider set of questions than the role of competition law, as it shows we understand economic participation and opportunity. A question that arises from recent ­decisions by the courts is how to strike a balance between the right of the public to enjoy the benefits of competition and the rights of respondents to a fair hearing.

These questions are best considered within the context of the country’s economic realities and also its aspirations. The economy remains highly concentrated in terms of the main firms that dominate key sectors. In any given market it is likely that the lead firm would have been established 15 to 20 years ago. This relatively low level of dynamism may reflect the efficiencies of the incumbent, but equally it may reflect barriers to entry, including those deriving from incumbents’ competitive strategies that seek to handicap new entrants and smaller firms.

Competition in a market economy is generally conceptualised as a rivalrous, information-generative process that seeks to produce the best ideas and mechanisms of production and distribution. The importance of the competitive process is enshrined in various schools of thought about the workings of market economies. Joseph Schumpeter believed the “creative gale” of competition, destroying old modes of production and organisation and replacing them with efficient, more innovative ones, should be self-regulating.

Now, the potential calcifying force of entrenched market power is widely recognised in modern microeconomics, along with the value of protecting the competition process in the interests of innovation, opportunity, economic growth and development.

Global competition policy scholar David Gerber characterises the economic choices that a society makes with regard to the role and bounds of the market mechanism and the state in the economy as a country’s “economic constitution”, much like a political constitution. This economic constitution also informs decisions about the type of institutions that are created to implement the basic tenets of the economic constitution and their governance and inter-relationships. Competition law and institutions are arguably among the most important components.

In Germany the post-war economic consensus was informed by the desire to protect economic liberty from both the state and private economic concentrations. As Gerber points out, this was a reaction to the concentration of economic power and cartel arrangements that had taken root during the Weimar regime, which were considered, at least at the time of post-war reconstruction, to have paved a path for national socialist economic and political promises and the rise of Nazism.

In the United States the competition regime grew as a counterpoint to the abuse of power by trusts such as Standard Oil, whereas in East Asian countries competition policy was introduced within the context of rapid ­industrialisation driven by the developmental state.

A strong emphasis on promoting competition is important in South Africa because of the stifling nature of old networks. In the past these straddled the state and business, such as when agricultural co-operatives were appointed as agents of the control boards, or the cement industry was allowed to run its own cartel.

Although these networks may have lost the type of access they had to the state, recent competition cases have shown that they are able to continue to control private activity. Multilayer cartels have been uncovered in concrete pipes, cement, reinforcing steel, scrap metals, flour and bread.

What is often not recognised is that for cartels to be sustained they must not just agree among themselves, but must also keep out new entrants attracted by the high profits. So, not only are consumers harmed by the ­collusive prices, but so is opportunity. Dynamism is harmed in another way as managers who guaranteed their market share through collusive arrangements enjoy the “quiet life” rather than worrying about quality and service. The importance of competition in stimulating and rewarding management effort should not be underestimated.

The orientation to protecting their position through erecting defences to potential rivals has been characterised as “handicap competition”, seeking strategies to disadvantage and undermine other firms outside the club through devious schemes, as compared with “performance competition” where managers commit themselves to winning in the marketplace through the legitimate pursuit of productivity and efficiency.

It is important that a country takes a view on the appropriate stance when weighing up the interests of new and entrenched business. Given our status quo, not facing up to the tension between the interests of entrants and incumbents is in effect a decision to support the existing networks, albeit with some new members likely buying into them.

The Latin American experience may be instructive where the development of competition law was hostage to the region’s economic history. As these economies were largely dependent on extractive industries and agriculture, elites were indifferent to the value of competition in the economy.

It has only been through globalisation and concerns over inequality that competition law has gained traction in recent times.

We believe that in South Africa it is necessary to take a positive stand on future competition through widening participation and increased diversity as guiding principles. This is consistent with supporting entrepreneurship and creativity whereby different ideas and approaches are introduced to the marketplace and tested.

It is important, therefore, to be vigilant in addressing the ways in which entrenched incumbents can protect their position, as well as seeking to craft remedies that facilitate entry and increased participation.

Such an approach by the competition authorities is complementary to an economic policy framework that is supportive of meaningful opportunity and entrepreneurship. This simultaneously requires a look at removing government-erected obstacles to small firms and effective actions to support the development of capabilities and the ability to compete in applying them in business. Such action is required if empowerment and economic freedom is to have meaning.

Trudi Makhaya and Simon Roberts are economists at the Competition Commission. They write in their personal capacity