Opinionista Thando Vilakazi and Sumayya Goga 30 November 2020

Nothing to lose: Open the South African economy – A call to action

The structure of the South African economy welcomes few entrants. It remains highly concentrated with insiders still firmly entrenched. If the economy is going to recover after the Covid-19 pandemic, it needs to move on to a different path and be opened up to entrepreneurship, investment and creativity.

Opening the South African Economy will require a concerted and collaborative effort by government to alter the economic landscape, remove barriers to entry, enhance competition and foster inclusive growth. 

New entrants are not just important in their own right – they are essential for economic dynamism and resilience overall.

The insights from our in-depth firm-level and industry analyses make the fairly obvious point that there is a range of mutually reinforcing factors which stack up to block greater participation in the economy by entrepreneurs. 

Only by tackling these blockages together can we genuinely move forwards.

Key factors in opening the economy include: widening routes to market to reach consumers; using existing regulatory tools to encourage greater competitive rivalry in key economic sectors; breaking into vertically integrated value chains for key inputs and/or customers; ensuring sources of “patient” capital for entrepreneurs to learn from mistakes and build businesses. 

Finance is often cited as the determining factor in new business success, but the research suggests that providing development finance, without addressing other barriers to entry, is likely to be a waste of money. 

In our recently published book, examples of successes and failures are brought together so that we can learn lessons. These include studies of Capitec, Fruit & Veg City, Soweto Gold, low-cost airlines, a community newspaper, and sector studies of telecoms, agroprocessing, liquid fuels and mobile money. 

Successful entry has introduced new business models, increased investment and saved consumers billions of rands. Failures, such as in airlines, have had the opposite effect. 

Indeed, the exceptions of success prove the rule that South Africa has a history of incumbents protecting their positions, including through cartel behaviour and abuse of their monopoly positions. 

The result is a toxic mix of low levels of investment, low growth and employment, and weak productivity. Policymakers across sectors need to prioritise opening up markets. 

There have been some positive developments, but these have been piecemeal and isolated. For example, the Competition Commission’s grocery retail market inquiry has finally led to the end of exclusive leases where incumbent supermarkets block competitors. 

Now this needs to be followed through with measures working together with supermarkets to open up routes to market for suppliers. 

On the whole, though, policy decisions have too often supported the interests of large incumbent firms, or “national champions”, protecting them in exchange for a BEE “quid pro quo” with increased black shareholders. But this serves merely to entrench the dominant firm’s power rather than encourage rivals to challenge it. 

Without material changes to market access, black industrialists cannot become independent, competitive businesses, but will remain partners and essentially subordinate to incumbents. And our economy will continue to stagnate. 

We propose a policy agenda aimed at opening access through a powerful raft of complementary measures. It is time to change the rules of the game through four main approaches:

First, regulate for competitive rivalry: regulation should favour entrants and ensure incumbents can be effectively challenged, particularly in network industries such as energy, telecommunications and banking. Of course, there are economies of scale which mean we will continue to need large firms. As with the global debate over digital platforms, businesses occupying a “strategic market status” cannot be allowed to use this to stifle rivalry up and downstream. In telecoms, the spectrum auction is an opportunity to ensure effective rivalry and inclusion (and not through putting faith in the usual suspects).

Second, the amended Competition Act empowers the authorities to level the playing field and emphasises competition as a dynamic process of rivalry. Greater participation brings new ideas and business models. But enforcement is necessarily cumbersome and can involve extensive litigation and so it needs to be complemented by a competition policy that cuts across the economy as a whole, with measures to take forward the insights from targeted market inquiries. 

Third, government should introduce proactive enabling measures to support new entrants and rivals. For example, penalties paid by firms in contravention of the Competition Act could be pooled to form a lower interest and higher risk development fund to finance entrants at different levels of a value chain, with an emphasis on supporting black industrialists and other innovative entrants. Our research also finds that black economic empowerment and procurement policies need to improve substantially to create opportunities for meaningful participation.

Yes, some firms will fail, but contestation between rivals is part of the process. Crafting a more integrated industrial policy that encompasses competition policy, and incorporating the IDC’s role in providing funding for entry, is key. A study on the effectiveness of the DTIC’s Black Industrialists Scheme found that patient capital and access to markets are key to establishing black businesses as effective participants in the economy. 

Fourth, supermarkets are particularly important as a route to market for a wide range of suppliers. There needs to be a focus on local sourcing to support local suppliers and build their capabilities. Supplier development programmes combined with codes of conduct and development finance can reshape competition to build supplier capabilities. 

For example, supplying food is as much about packaging, logistics and technology, as about the actual agricultural product. In agroprocessing this needs to be harnessed to expand competitive production in southern Africa as a whole to turn it from a net food importer to an exporter. 

Finally, we would encourage cities and government to “test and learn”. Introduce local initiatives to support suppliers to find markets and enable entrepreneurs to try and try again. 

The depressed state of the economy currently suggests that we have nothing to lose. BM/DM

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All Comments 4

  • Unfortunately for new entrants, there are many sectors where size is necessary. Take something simple like fruit packaging for export. The odds against a small operator meeting the standards and regulations necessary to comply with the requirements of the UK and EU and other markets is close to zero. So in the end, that sector will always be dominated by a few very large players.

  • “Now this needs to be followed through with measures working together with supermarkets to open up routes to market for suppliers”. One of the first things we can do is to to shop for “ugly vegetables”. Woolworths can take a lead. Enough said. Other supermarketeers not excluded. In Europe a very large chain actually educated its customers to shop for those. Everybody pitched in and won, the group and black farmers in Africa included. Much less waste and in line with the green idea. Before anything else, if we do not collectively throw off that “the big boss says” mentality, nothing will change. There will be no innovation where there is no profit to be made. Social schemes and dispensations have only one effect on the human soul and body. It makes you lazy. If you don’t work, you don’t eat still counts as much as we hate it. Worse, it robs you of the will to work and dare something new. Once you are blocked why try anyway? Waste of time.

  • Just struck me. This is another instance of changing the other guy first before I can do my thing. And we do not need violence to do so. Changing the other guy is a waste of time because he clings to his fond ideas, right or wrong as they may be. Italy forever stand as a beacon in my mind. For the first 25 years after WWII they had some 25 prime ministers. What got Italy through that? The cobblers, the milliners, the car makers, the bag makers (Gucci) and the other common folk with children to feed and homes to keep. Looks like America got its cando attitude from them. We need to show people on the street how to start their own businesses. None more admirable and respectable than the woman with her fruit/vegie stall on the kerbside in front of the supermarket.

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