SA NEEDS COMPETITION POLICY SUITED TO ITS DEVELOPING ECONOMY – BY DARYL DINGLEY

Monday, January 24, 2005
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“SA needs competition policy suited to its developing economy”
 
We require competition policy that is very different from that of larger and more developed economies such as those in the European Union and United States.
 
In small economies - such as South Africa - large industries are often highly concentrated.  Only a few firms operate in these markets for a number of reasons including:
 

firms need to secure a large portion of limited domestic demand to achieve the lowest costs of production;
the market cannot be expanded by exports because of volatile exchange rates, remoteness of supply, transportation costs and tariff barriers; and
the high sunk costs, that is, the costs committed to a specific production activity, create significant barriers to entry.
 
Competition is, therefore, likely to be restricted because small economies are more likely to support fewer firms in large and important industries such as paper, steel and cement.
 
Of course, the structure of these industries can affect the conduct of the participants and ultimately the performance of the sector. On the one hand, firms may choose to raise prices, reduce output or co-ordinate their conduct which could adversely effect consumers. On the other hand, a measure of concentration may result in productive and dynamic efficiency which could ultimately benefit consumers.
 
Competition authorities with a large economy mentality would tend to advocate structural policies such as merger prohibitions and divestiture. These policies tend to reduce the levels of concentration, boost competition and at the same time limit the potential for anti-competitive behaviour.
 
But small economies require competition authorities to make different welfare choices so that competition policy reflects a balance between the efficiency gains of scale economies and the outcome of inefficient and numerous competitors operating in the domestic market.
 
The pattern of anti-competitive behaviour often found in highly concentrated markets should be overcome by ensuring that the expected costs of anti-competitive behaviour outweigh the expected benefits. This can be achieved by an effective enforcement policy deterring anti-competitive behaviour.
 
Moreover, when reviewing mergers and acquisitions competition authorities in small economies should especially consider the investments by foreign firms through the acquisition of a local company. The call therefore, is that foreign direct investments (FDI) should fall into the hierarchy of competition policy considerations.    
 
FDI by means of a mergers or acquisitions often increases competition in a domestic market by imposing a constraint on domestic producers. However, mergers and acquisitions may also create market or monopoly power. In addition, a foreign owned domestic monopoly may generate negative economic consequences similar to the effects of a foreign monopoly exporting to South Africa. In such cases consumers will invariably be paying higher prices for goods or services and those gains or rents will be accruing to foreign firms.
 
In reviewing a merger or acquisition therefore, where control of a market is acquired by a foreign company, it is not sufficient for competition authorities to simply weigh up the pro-competitive or efficiency gains of the merger against the substantial lessening of competition in the market. While one could argue that efficiency might improve through skills transfers, foreign owners will gain from the monopoly rents at the expense of consumers in South Africa.
 
However, the inclusion of FDI into competition policy should be flexible because the efficiency gains may, in certain circumstances, improve the welfare of domestic consumers. This could occur, for example, where the foreign owned entity or subsidiary becomes a major exporter, resulting in foreign consumers contributing towards increased local wages and tax income.       
 
The large economy competition policy model developed in the United States and European Union does not always ‘fit’ in smaller economies such as South Africa. We should, therefore, develop competition policy that reflects our own unique social and economic context including:
 

our developing nation status;
small market economy; and
the possible effects of foreign mergers and acquisitions on our markets.