What the South African government can learn from Elsa

Government regulation has a chokehold on the economy. Elsa's advice can breathe new life into it.

At the heart of economics is the belief that competition between firms is good for the consumer. We are shopping constantly: from buying our daily groceries at the local supermarket, to browsing on Airbnb for the next holiday destination, to searching for which streaming platform to use to watch Frozen with your niece (it’s Disney+, of course).

Although we live in a world of variety, it is useful to remember that it has not always been that way. Only a few decades ago, there were only one or two television stations or, before 1976, none at all. There were only one or two brands of toothpaste or cereal or fruit juice. There was only one electricity supplier.

What has happened, then, in the last three decades is the expansion of competition in almost all markets. The local supermarket now has to compete against online retail. Even cellular companies, so dominant only a decade ago, are facing increased competition from other forms of digital connections. No wonder Telkom might soon merge with Rain.

But there is an important exception to this general trend, of course: state-owned entities. Firms like Eskom, Transnet, Denel, Rand Water, ACSA and so many others operate in markets that are uncompetitive, that is, where these firms are often monopolies. Take Eskom, for example. Until very recently, it was almost impossible for households to produce their own power. For most South Africans today, Eskom still is the only source of electricity. There is no consumer choice. We were all compelled to buy our power from Eskom. Transnet and Prasa, owners and operators of rail services, are more examples. If we wanted to use trains to transport freight or for commuting, we only had one option.

True, in some markets, state-owned entities had some competition, allowing consumer choice: many of us switched from SABC to DSTV a long time ago. But even so, government regulation often reserved special privileges for state-owned entities: consider the parking bays allocated to SAA’s airplanes at many airports in South Africa.

In late September, Willem Boshoff, one of South Africa’s leading competition policy scholars, delivered his inaugural address at Stellenbosch University. He made the case that competition not only offer immediate benefits to consumers, but generate long-run benefits to the economy too. Why? Because, in a competitive market, firms are forced to innovate to retain their customers. If they don’t, other firms will, and their profits will fall, ultimately putting them out of business. This need to innovate, then, pushes them to invest in new processes, equipment, people and anything that will allow them to stay one step ahead of their competitors. Greater competition thus boosts private fixed investment.

It is this private fixed investment, Boshoff argued in his address, that drives economic growth. ‘History tells us that, in the absence of such booms in fixed investment, economic upswings in this country are likely to be weak and of short duration. Fixed investment is critical to sustaining economic growth.’

Evidence of this can be found in the above figure. It shows real private fixed investment and real GDP between 1994 and 2022. In the first 14 years, real private fixed investment averaged 7.5% and real GDP 3.6%. Compare that to the next 14 years, real GDP fell to an average of 1.2%. That is largely because investment turned negative, with an average of -0.6%.

Why did private fixed investment suddenly decline post-2009? One reason, of course, was the global economic crisis that explains the large dip in 2009. But in many other economies, this dip was only temporary. Fixed investment in many economies climbed to above-crisis levels. Why did it not in South Africa? The answer: increasing constraints on competition, both in industries dominated by state-owned entities and in other sectors where government regulations reduced free enterprise.

Consider the mining sector, for example, where the government’s inability to enact a predictable licensing environment has kept new players out of the market. Says Boshoff: ‘We do not often think of the relatively weak performance of mining as signalling a competition problem. Yet when new mine shafts are not being sunk because of regulatory uncertainty, it has implications for industries dependent on mines, including the availability of opportunities for current and new entrants and hence incentives to innovate.’

One way the South African government has tried to boost investment is to insist on stronger competition policy. This sounds like a sensible strategy: indeed, I argued above that more competition should drive greater investment.

But the truth is that competition policy cannot correct the policy failures elsewhere in the economy. Even the competition authorities have recognized this. In a recent chapter, Tembinkosi Bonakele, Reena das Nair and Simon Roberts note that one of the cross-cutting conclusions from recent market enquiries has been that there is a need for ‘improved regulation and related policy measures’. Boshoff sum up the implications: ‘What is therefore required is not more aggressive competition policy, but an extensive reconsideration of the competitive impact of broader government policies and of policymaking in key sectors. When broader government policies work to inhibit competition, pursuing more aggressive competition policy will not be effective.’

To build a thriving economy, we need firms to invest. Firms operating in markets where they face fierce competition have every incentive to invest in order to outdo their rivals. Restrictive government regulation and inaction – be that as producer in state-owned entities or as arbiter of licenses or other prohibitive rules – inhibits competition and, therefore, investment, slowing economic growth.

Government regulation has a chokehold on the economy. The only way to return to growth is to let it go.

An edited version of this article was first published on News24. Data by Codera Analytics. Photo by Z Graphica on Unsplash. Willem Boshoff’s inaugural lecture is available on YouTube.