IOL - OPINION / 13 JANUARY 2020 - 08:00 / SIYABONGA HADEBE
PRETORIA – South Africa struggles with high unemployment, low economic growth, poverty and inequality. It doesn’t look like like the situation will improve anytime soon. For example, the World Bank welcomed South Africans to the new year with sad but not entirely surprising news that the economy will grow by less than a percentage point due to electricity supply concerns. This is way below what the country needs to reduce unemployment and poverty.
It has been rightly pointed out that the country has to, among others, grow the economy by at least 5 percent to eradicate the stubborn socio-economic problems. As such, all sorts of ideas and interventions are in place to find long lasting solutions to the economy. However, it appears that the reasons advanced for sluggish economic performance and solutions designed to untangle the challenge of poor performance are either misplaced or look for at wrong things. Hence, whatever programmes or promises that is in place and or geared to solve the problems related to the struggling economy are destined to fail.
Somalis, Ethiopians, Pakistanis and others have easily outsmarted locals in their own backyard. Photo: Mike Hutchings/Reuters
My argument in this piece is that the main problem facing the South African economy lies in its structural makeup and persisting belief that the present structure can still be useful in enhancing growth. The SA economy is dominated by few monopolies and is also heavily capitalized which gives too much power to the financial sector and banks to direct future outcomes. Teboho Bosiu, Nicholas Nhundu, et.al. argue, “The structure of the South African economy is characterized by large firms with significant amounts of retained profits, and persistent high levels of concentration reinforced by high barriers to entry.”
To solve the seemingly permanent economic woes, it suggested that these monopolies need to be broken to increase competition. It is hoped that this move will facilitate entry of many small, micro and medium enterprises (SMMEs) in the different economic sectors o, and thus allow participation by the black majority in the economy.
Concentration isn’t just a South African problem, the United States is confronted with dominant firms in almost all sectors of the economy including technology and aviation. Presidential hopeful and Massachusetts senator Elizabeth Warren in 2019 announced a plan that “aims to reverse what is now a nearly four-decade trend in the concentration of corporate power in the US economy.” Her argument is that consolidation helps to depress wages, inflate executive pay and stifle the rise of new businesses.
Warren adds that this inadvertently contributes to the decline of middle-class financial security and the rise of income and wealth inequality. She argues, “Left unchecked, concentration will destroy innovation... concentration will destroy more small companies and startups [and] will suck the last vestiges of economic security out of the middle class.”
Democratic dividend will be forever lost
Thus, the idea behind this article is to suggest the same policy for a highly concentrated South African economy. Underpinning this is the view that there is no hope that the present structure of the economy will ever pull millions of people out of poverty and get them to also enjoy the wealth of their country. Moreover, should the status quo remain it means that the democratic dividend will be forever lost and anarchy will prevail.
It is not that this problem of oligopolies and monopolies is not known. Former Small Business Development Minister Lindiwe Zulu said in July 2019 the monopolies “do not help the nation.” And Matthew Kofi Ocran, Professor of Economics at the University of the Western Cape, also observed that the dominance of big players is bad for South Africa’s economy. He says that radical economic transformation requires “a structural change of the post-apartheid economy in a way that creates space for the black majority to participate fully.”
The main problem is that South Africa has never really conceptualized a new economy that promotes a large scale participation by all citizens. The economy retains a colonial or apartheid structure where just a few companies, both private and public, dominate all key sectors. These companies aren’t even interested to open up their value chains to other players, particularly small and medium size firms.
But a well-functioning, competitive economy doesn’t need gatekeepers. This is a big concern since these companies are allowed to act as they do for as long as they extend patronage to politically-connected individuals or their agents. Political capital is used to frustrate change in the economy and the country as a whole.
It may thus be argued that any effort aimed at growing the economy should commence with breaking up the existing monopolies and to re-design the financial services sector. This will allow for the decentralization of economic units to local level, where communities can have power to decide the nature of economy they want.
Therefore, the departure point of this opinion piece is the recognition that the monopolies such as Woolworths, Pick ‘n Pay, Naspers, MTN, Sasol, Sibanye, Vodacom, Sasko, FNB, etc. are squarely to blame for bad economic performance because they hold the SA society at ransom using all tactics available in the book. They have consolidated their business interests to a point that new entrants find it extremely difficult to operate in the different sectors of the economy. And all they are interested in is using the exorbitant profits earned in the country for their international expansion.
Value addition activities
Reality is that South Africa has fewer SMMEs, in a true sense of the word, than it is always said. Very few SMMEs engage in value addition activities and even a lesser number operates in high growth or tertiary sectors of the economy. What is referred to as small businesses in mainly black areas are mere extensions of these monopolies, and offer no competition to them.
The present economic structure favours these large companies whose interest is to raise barriers of entry at all cost. Respected entrepreneur Xolani Qubeka feels that for South Africa to experience radical economic transformation it should emulate Germany “where 90 percent of companies who generate the most wealth are SME's, with the remaining 10 percent being private companies.”
So, it is impossible to imagine that South Africa can give birth to millions of start-up scientific research or information technology enterprises that can rival their Silicon Valley counterparts. Large corporations aren’t really interested in research and development. And they are not keen on seeing SMMEs actively playing in the same space as them. Even universities are not really designed to stimulate commercial activity from their end. As a result, argue Teboho Bosiu, Nicholas Nhundu, et.al., the country is rapidly de-industrializing.
Large companies are awashed in money and resources, meaning they can buy anything they want including technologies and new products without developing their own. For example, the big five banks are like one company that operates under different names - there is nothing that differentiates them in terms of services and offering. The banking sector is least competitive and is dull. It is troubled like other sectors of the economy where collusion is rife and prices are inflated.
What the financial sector does best, in conjunction with insurance companies, is robbing consumers of their hard earned money in broad daylight. In addition, the sad story of Vodacom and young inventor Nkosana Makatu tells you that the large companies aren’t even prepared to contribute meaningfully to innovation and development of new companies. How does anyone expect the economy to grow under these conditions?
Township Economy Revitalization
The Gauteng province coined the phrase of "township economy" to note the existence of enterprises and markets based in the townships. In its ‘Township Economy Revitalization 2014-19 Strategy’ document, the province argues that “these enterprises are operated by township entrepreneurs to meet primarily the needs within and beyond the township and therefore can be understood a ‘township enterprises’ as distinguished from those operated by entrepreneurs outside the township.”
Gauteng also suggests that these township enterprises “are diverse, with high rate of informality and provide a range of goods and services to meet the needs of township communities and beyond.” This definition appears straightforward until one digs deeper to find out if these enterprises really exist in the form and shape that shows ‘informality’ and vibrancy.
A new but distraught entrepreneur in one of the townships in Durban, Thalente Zuma, once said to me, “All the products I sell at the shop none are black made or black owned. A simple thing like bread we don't even control.” Zuma added, “There is no such thing as a township economy because all the goods we consume are not torally black controlled. Even ‘igwinya’ enriches Sasko and NCP yeast... Something drastic must happen!” The entrepreneur’s concerns are quite valid.
Spaza shops are neither informal nor SMMEs, for example. Unless we limit the term of SMME to physical size and revenue, the business operations of township enterprises are disappointingly a useful creation of large corporations rather than genuine entrepreneurial endeavor. Many enterprises in townships and rural areas are retail outlets for large business, and don’t sell anything produced locally.
Large companies operating in the FCMG sector like South African Breweries, Sasko, MTN, Vodacom and Makro have informally set up spaza shops as their low-cost outlets, which one doesn’t need to acquire a franchise right. These spaza shops carry most of the merchandise that large retailers sell. There is no difference.
That is basically the reason general dealers and spaza shops quickly die when a large retailer enters a township. They cannot compete in price and economies of scale, with the exception of toxic beer taverns set up by SAB to protect its market. But for the rest, black businesses in townships are vulnerable and weak. That explains how they have given their sizeable market share worth over R7 billion to foreigners.
Locals outsmarted in their own backyard
There is absolutely no differentiation between shops in townships and those in urban areas. The challenge is that township enterprises don’t source their goods and services from their own suppliers where they can negotiate prices in order to compete with the likes of Pick ‘n Pay. South African small operators have a lot to learn from their counterparts in other parts of the African continent. Or entrepreneurs engage in value addition activities like tailoring suits and making shoes.
Thus, street markets in Nigeria or Ethiopia sell goods that are manufactured by local producers. This explains why Somalis, Ethiopians, Pakistanis and others have easily outsmarted locals in their own backyard. Their mindset for doing business is completely different from that of South Africans. The problem is both historical as a result of previous laws as well as current in that monopolies dominate all space in the economy. The conduct of banks and financiers worsens the situation with their discriminatory practices.
Another issue is that the over-concentration of monopolies makes South Africa to have one of the least diversified types of goods found in supermarkets. A country such as the US with a highly decentralized economy has millions of different products to chose from. If local producers were not as protected from competition, it is likely that products found in Ngwavuma, for example, would be significantly different from those found in Mafikeng or Giyani.
The character of a good and healthy economy lies in the diversity of players. The retail sector three to five players that determine which products can occupy their shelves. It is mainly products produced by white suppliers that are given preference.
Popular radio deejay Sibusiso Leope struggled to get his energy drink MoFaya in large stores. At worst, products like MoFaya and craft-beer Soweto Gold end up being acquired by international players. In 2017, Coca-Cola acquired a 26 percent stake of his MoFaya beverages company for around R493 million, and Heineken bought Soweto Gold.
It is important to note that there is nothing untoward in these transactions from a business point of view. But politically, they have serious implications. It means fewer products that are truly black-owned and or produced in the market. The argument remains that the black industrialist programme of the department of trade and industry should prioritize burgeoning companies like MoFaya and Soweto Gold.
Nigeria becomes a significant economy
It is fair to suggest that industrial policy, integrated development plans of municipalities, agricultural/ rural development policies and other strategies have to be synchronized in order to help small enterprises (manufacturers) to produce and enter value chains of retailers, local and national. At the moment there is no strict law compelling big retailers to source goods from local, emerging producers.
Nigeria’s strategy of forcing foreign retailers like Shoprite and Woolworths to buy stock from local producers and outlets has been rather successful. Nigeria has suddenly become a significant economy, and the government insistence on limiting imported goods has increased participation by Nigerians.
Woolworths failed to cope and complained that Nigeria has “high rents and duties....” in the end, the company in 2013 decided to quit the Nigerian market. Woolworths is so used to the South African environment where it is setting rules that favours itself and fellow retailers. With no one forcing these firms to buy from small producers, they have a free reign in the market. They also control it with an iron-fist.
Public commentator Yamkela Spengane posits, “The biggest fallacy we have internalised as a people is that you can develop townships. You cannot develop townships brethren.” Spengane adds, “Economic activity is still designed as such that blacks leave the township in the morning, work for those who own the means of production, then come back to the township at night.” Many who reside in townships understand the challenges pointed out in this article.
As a result, it is necessary to formulate policies that will support community-based income generating activities through affirmative procurement and set-asides, to spur on township and rural economies. But believing that taverns and car-washes would lead to economic transformation and create jobs is devoid of logic and understanding of economic development.
Something that we have to admit is that schemes like black economic empowerment was never aimed at creating a new entrepreneurial class but to entrench the power of big corporations and white ownership in the economy. The policies like black economic empowerment (BEE) and affirmative action, among others, have resulted in a notion of a ‘rainbow’. In Japan, when something is magnificently beautiful but lacks, or has no substance, they call it a rainbow.
BEE fizzled without leaving any impression
Truth to be told, BEE fizzled without leaving any impression and even those who benefited cannot claim to be in charge of anything. Very few, if any, companies developed from BEE policies that could claim that they have altered the faced of the South African economy. From the beginning, it was quite naive to believe that monopolies were going to create competitors or to allow their equity to be diluted.
In fact, the BEE share schemes like Sasol Inzalo, Barloworld Khula Sizwe, etc. were meant to siphon cheap finance off unsuspecting black publics by selling false hope to them. Normally, these BEE share schemes result in blacks controlling no significant stake, or they are low class shares. For example, Barloworld in June 2019 announced that it raised R164m for its Khula Sizwe empowerment transaction. MultiChoice Phuthuma Nathi is made up of 67.5 million shares that are held by about 90,000 black investors.
Phuthuma Nathi shareholders are unlikely to be transferred to the new Naspers adventure in the Netherlands. But their money was, in all likelihood, used to acquire assets all over the world. A minuscule dividend is money like a word of appreciation for helping the company to access cheap funding and to enter foreign markets.
From what has been presented, it is apparent that the informal sector, SMMEs, BEE and ‘township economy’ exist under the shadow of monopolies. Without any serious policy shift to reduce the number of monopolies, there is no hope that South Africa will ever grow its economy and also address its huge unemployment problem. Ocran argues, “There is evidence that over-concentration tends to impede job creation.”
The country is held hostage by large companies that would rather build malls or expand their business abroad than integrating small enterprises in their value chains. In fact, there isn’t even a need for them to do this, they must be broken up to smaller pieces. The exception should be state-owned enterprises for as long they are going to be well run and also to become catalysts for economic development in communities.
Going forward, the roles of public institutions such as the Competition Commission, Public Investment Corporation (PIC), South African Reserve Bank (SARB) and development finance institutions such as Development Bank of Southern Africa (DBSA), Industrial Development Corporation (IDC) and the Land Bank may have to be seriously redefined and re-positioned to support broader economic participation, economic growth and employment creation.
In this regard, the reserve bank is too conservative as it is reluctant to give out licenses to black and community organizations to create their own banks. For the Competition Commission, it must intervene and break-up oligopolies. Simple as that!
Siya yi banga le economy!
Siyabonga Hadebe is an independent commentator on socio-economic, politics and global matters based in Pretoria.
LINK : https://www.iol.co.za/business-report/opinion/sa-economy-exists-under-the-shadow-of-monopolies-40478331
Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER