Wealth Gap: Snatch away today our?daily bread

2015-03-01 15:00

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In response to Thomas Piketty’s inequality tome, Capital in the Twenty-First Century, some commentators have embraced competition policy as a mechanism to reduce inequality.

Their logic cannot be faulted. The link between anticompetitive practices and inequality is not one that is often made in economics literature about competition.

But it is not difficult to see how cartels and exclusionary practices by firms perpetuate inequality. These practices raise prices for consumers, limit new business formation and employment and destroy the trust between business and society.

This perverse redistribution of wealth – from consumers in a country where just under half of the population lives in poverty to wealthy shareholders and executives in private and state-owned firms – fuels inequality.

The mechanisms through which cartels distort the market speak to the cosy and closed nature of business in South Africa. Going through the considerable evidence that has been placed in front of competition authorities gives some perspective into these arrangements.

Executives convene secret, and sometimes not-so-secret, meetings to agree on price increases, divide territory to avoid head-to-head competition and rig tenders. Elaborate mechanisms to exchange sensitive information are set up to manage the agreed outcomes. This is the kind of cosiness that serves to keep newcomers out of the economy.

When one considers that just over a third of the expenditure in poor households is on food (with bread and cereals the leading categories), it is not surprising the Human Rights Commission characterised cartel members controlling bread, flour and maize prices as “thieves at the dinner table”.

This apt phrase inspired the title of David Lewis’ book on competition enforcement, which paints the picture of the never-ending work of competition authorities in uprooting entrenched practices that distort the playing field.

Though some of the most prominent competition cases in South Africa have involved cartels in the bread and construction sectors, other types of abusive behaviours that fall foul of competition legislation – such as exclusionary behaviour and excessive pricing – take their toll on the economy.

Value-adding industries are held back by the high input prices that result from such behaviour.

Government spending should be used in ways that support economic development, but the state has overpaid for goods and services. The construction fast-track settlement process, which saw some of the companies in that sector confess to tender-rigging, revealed the scale of the problem. Local governments and cities, as well as the departments of health and defence, are just some of the victims from the construction case. There are also many other instances of anticompetitive behaviour – in furniture removals, antiretroviral supply and uniforms.

Instead of aiding the poor, public money is siphoned to line the pockets of bid-riggers and the public officials who aid them.

It is difficult to quantify the harm, both to society and financially, caused by anticompetitive behaviour that results in perverse redistribution throughout South Africa.

Data availability, methodological and even legal challenges beyond the control of researchers complicate these efforts. However, a growing body of literature is emerging that seeks to quantify this harm.

Competition Commission economists Junior Khumalo, Siphamandla Mkhwanazi and Hariprasad Govinda estimate that after the cement cartel – which saw the main producers fixing prices and allocating markets – was prosecuted, consumers made savings of between R4.5?billion and R5.8?billion from 2010 to 2013. Economists also found the market was more dynamic, as firms crossed the artificial barriers that had been created to avoid competing. This study adds to others – in industries such as milling and those making plastic pipes, bread and long steel – that suggest lower prices, new entrants and greater rivalry become the order of the day after cartels have been bust.

These outcomes are more consistent with efficiency and inclusivity.

Anticompetitive behaviour favours inequality by denying newcomers the opportunity to enter a market and expand within it, thereby increasing production and employing people.

It’s often argued employment is the most effective solution to the country’s inequality challenge. Yet an environment where small or new high-potential businesses are not able to thrive – as independent bakeries in the Western Cape or value-adding managed-network service providers found out – undermines the country’s efforts towards job creation.

Concentrated markets, low levels of entrepreneurial activity, high unemployment and limited value-added activity will remain our lot if anticompetitive behaviour persists. In such an environment, incumbency is rewarded while upward mobility remains the preserve of a few. This not only fuels inequality of income, but also the inequality of asset accumulation.

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